Intco Medical Technology (SZSE:300677) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Intco Medical Technology Co., Ltd. (SZSE:300677) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Intco Medical Technology

How Much Debt Does Intco Medical Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Intco Medical Technology had debt of CN¥13.3b, up from CN¥5.31b in one year. However, it does have CN¥18.4b in cash offsetting this, leading to net cash of CN¥5.11b.

How Strong Is Intco Medical Technology's Balance Sheet?

We can see from the most recent balance sheet that Intco Medical Technology had liabilities of CN¥14.7b falling due within a year, and liabilities of CN¥2.17b due beyond that. On the other hand, it had cash of CN¥18.4b and CN¥1.53b worth of receivables due within a year. So it can boast CN¥3.09b more liquid assets than total liabilities.

It's good to see that Intco Medical Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Intco Medical Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Intco Medical Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥614m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intco Medical Technology can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Intco 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, Intco 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 we empathize with investors who find debt concerning, you should keep in mind that Intco Medical Technology has net cash of CN¥5.11b, as well as more liquid assets than liabilities. So we don't have any problem with Intco Medical Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Intco Medical Technology that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.