We Think SonoScape Medical (SZSE:300633) Can Manage Its Debt With Ease

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, SonoScape Medical Corp. (SZSE:300633) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SonoScape Medical

What Is SonoScape Medical's Debt?

As you can see below, SonoScape Medical had CN¥104.2m of debt at September 2023, down from CN¥139.1m a year prior. But it also has CN¥1.75b in cash to offset that, meaning it has CN¥1.64b 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¥599.9m falling due within a year, and liabilities of CN¥54.2m due beyond that. Offsetting this, it had CN¥1.75b in cash and CN¥198.2m in receivables that were due within 12 months. So it can boast CN¥1.29b 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!

In addition to that, we're happy to report that SonoScape Medical has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SonoScape Medical may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SonoScape Medical produced sturdy free cash flow equating to 76% 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¥1.64b in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So we don't think SonoScape Medical's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in SonoScape Medical, you may well want to click here to check an interactive graph of its earnings per share history.

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.