Does SonoScape Medical (SZSE:300633) Have A Healthy Balance Sheet?

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 note that SonoScape Medical Corp. (SZSE:300633) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SonoScape Medical

What Is SonoScape Medical's Net Debt?

As you can see below, at the end of March 2024, SonoScape Medical had CN¥250.0m of debt, up from CN¥230.5m a year ago. Click the image for more detail. But it also has CN¥1.96b in cash to offset that, meaning it has CN¥1.71b net cash.

How Strong Is SonoScape Medical's Balance Sheet?

We can see from the most recent balance sheet that SonoScape Medical had liabilities of CN¥731.6m falling due within a year, and liabilities of CN¥55.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.96b as well as receivables valued at CN¥200.4m due within 12 months. So it actually has CN¥1.38b more liquid assets than total liabilities.

This short term liquidity is a sign that SonoScape Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SonoScape Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, SonoScape Medical saw its EBIT drop by 2.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SonoScape Medical's ability to maintain a healthy balance sheet going forward. 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 SonoScape Medical 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 most recent three years, SonoScape Medical recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 investigate a company's debt, in this case SonoScape Medical has CN¥1.71b in net cash and a decent-looking balance sheet. So we don't think SonoScape Medical's use of debt is 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. For example, we've discovered 1 warning sign for SonoScape Medical that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.