Would Blue Sail MedicalLtd (SZSE:002382) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Blue Sail Medical Co.,Ltd. (SZSE:002382) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

How Much Debt Does Blue Sail MedicalLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Blue Sail MedicalLtd had debt of CN¥3.96b, up from CN¥3.10b in one year. However, it also had CN¥2.25b in cash, and so its net debt is CN¥1.71b.

How Strong Is Blue Sail MedicalLtd's Balance Sheet?

The latest balance sheet data shows that Blue Sail MedicalLtd had liabilities of CN¥3.81b due within a year, and liabilities of CN¥3.21b falling due after that. Offsetting this, it had CN¥2.25b in cash and CN¥1.07b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.70b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥4.98b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Blue Sail MedicalLtd will need earnings to service that debt. 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.

In the last year Blue Sail MedicalLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥5.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Blue Sail MedicalLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥560m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥820m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Blue Sail MedicalLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.