Lepu Medical Technology (Beijing) (SZSE:300003) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Lepu Medical Technology (Beijing) Co., Ltd. (SZSE:300003) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Lepu Medical Technology (Beijing)

What Is Lepu Medical Technology (Beijing)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Lepu Medical Technology (Beijing) had CN¥4.58b of debt in September 2023, down from CN¥4.85b, one year before. However, it does have CN¥5.13b in cash offsetting this, leading to net cash of CN¥547.0m.

How Healthy Is Lepu Medical Technology (Beijing)'s Balance Sheet?

According to the last reported balance sheet, Lepu Medical Technology (Beijing) had liabilities of CN¥3.77b due within 12 months, and liabilities of CN¥3.63b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.13b as well as receivables valued at CN¥2.07b due within 12 months. So its liabilities total CN¥207.5m more than the combination of its cash and short-term receivables.

Having regard to Lepu Medical Technology (Beijing)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥27.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Lepu Medical Technology (Beijing) boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Lepu Medical Technology (Beijing) saw its EBIT drop by 3.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lepu Medical Technology (Beijing)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lepu Medical Technology (Beijing) 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 three years, Lepu Medical Technology (Beijing) produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Lepu Medical Technology (Beijing) has CN¥547.0m in net cash. So we don't think Lepu Medical Technology (Beijing)'s use of debt is risky. 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 - Lepu Medical Technology (Beijing) has 1 warning sign we think you should be aware of.

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.