Is SonoScape Medical (SZSE:300633) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SonoScape Medical Corp. (SZSE:300633) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for SonoScape Medical

What Is SonoScape Medical's Debt?

As you can see below, at the end of September 2024, SonoScape Medical had CN¥350.4m of debt, up from CN¥104.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.85b in cash, so it actually has CN¥1.50b net cash.

A Look At SonoScape Medical's Liabilities

We can see from the most recent balance sheet that SonoScape Medical had liabilities of CN¥935.2m falling due within a year, and liabilities of CN¥100.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.85b as well as receivables valued at CN¥183.0m due within 12 months. So it actually has CN¥995.5m more liquid assets than total liabilities.

This surplus suggests that SonoScape Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SonoScape Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that SonoScape Medical's load is not too heavy, because its EBIT was down 56% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, SonoScape Medical produced sturdy free cash flow equating to 62% 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 investigate a company's debt, in this case SonoScape Medical has CN¥1.50b in net cash and a decent-looking balance sheet. So we are not troubled with SonoScape Medical's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for SonoScape Medical 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.