Here's Why Blue Sail MedicalLtd (SZSE:002382) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Blue Sail Medical Co.,Ltd. (SZSE:002382) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Blue Sail MedicalLtd

What Is Blue Sail MedicalLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Blue Sail MedicalLtd had debt of CN¥3.47b, up from CN¥3.07b in one year. On the flip side, it has CN¥1.49b in cash leading to net debt of about CN¥1.98b.

How Strong Is Blue Sail MedicalLtd's Balance Sheet?

According to the last reported balance sheet, Blue Sail MedicalLtd had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥2.36b due beyond 12 months. On the other hand, it had cash of CN¥1.49b and CN¥1.00b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.92b.

Blue Sail MedicalLtd has a market capitalization of CN¥5.60b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Blue Sail MedicalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Blue Sail MedicalLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.7b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Blue Sail MedicalLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥661m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥658m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Blue Sail MedicalLtd .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.