Is Double Medical Technology (SZSE:002901) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Double Medical Technology Inc. (SZSE:002901) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its 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 June 2024, Double Medical Technology had CN¥393.0m of debt, up from CN¥342.2m a year ago. Click the image for more detail. However, it does have CN¥1.39b in cash offsetting this, leading to net cash of CN¥995.2m.

How Healthy Is Double Medical Technology's Balance Sheet?

According to the last reported balance sheet, Double Medical Technology had liabilities of CN¥995.6m due within 12 months, and liabilities of CN¥280.5m due beyond 12 months. Offsetting this, it had CN¥1.39b in cash and CN¥279.7m in receivables that were due within 12 months. So it actually has CN¥391.8m more liquid assets than total liabilities.

This surplus suggests that Double Medical Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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¥65m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Double Medical Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last year, Double Medical Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Double Medical Technology has CN¥995.2m in net cash and a decent-looking balance sheet. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Double Medical Technology (of which 1 is potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.