Double Medical Technology (SZSE:002901) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Double Medical Technology Inc. (SZSE:002901) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Double Medical Technology

What Is Double Medical Technology's Net Debt?

As you can see below, at the end of March 2024, Double Medical Technology had CN¥558.8m of debt, up from CN¥164.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.58b in cash, so it actually has CN¥1.02b net cash.

A Look At Double Medical Technology's Liabilities

According to the last reported balance sheet, Double Medical Technology had liabilities of CN¥1.08b due within 12 months, and liabilities of CN¥316.4m due beyond 12 months. On the other hand, it had cash of CN¥1.58b and CN¥255.6m worth of receivables due within a year. So it can boast CN¥447.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Double Medical Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Double Medical Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Double Medical Technology turned things around in the last 12 months, delivering and EBIT of CN¥20m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Double Medical Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Double Medical Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Double Medical Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Double Medical Technology has net cash of CN¥1.02b, as well as more liquid assets than liabilities. So we are not troubled with Double Medical Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Double Medical Technology has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com