Shenzhen Mindray Bio-Medical Electronics (SZSE:300760) Has A Rock Solid Balance Sheet

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. As with many other companies Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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.

What Is Shenzhen Mindray Bio-Medical Electronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Mindray Bio-Medical Electronics had debt of CN¥121.7m, up from none in one year. But on the other hand it also has CN¥17.7b in cash, leading to a CN¥17.5b net cash position.

How Healthy Is Shenzhen Mindray Bio-Medical Electronics' Balance Sheet?

The latest balance sheet data shows that Shenzhen Mindray Bio-Medical Electronics had liabilities of CN¥11.6b due within a year, and liabilities of CN¥4.03b falling due after that. Offsetting these obligations, it had cash of CN¥17.7b as well as receivables valued at CN¥3.84b due within 12 months. So it can boast CN¥5.91b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Mindray Bio-Medical Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Mindray Bio-Medical Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Shenzhen Mindray Bio-Medical Electronics

The good news is that Shenzhen Mindray Bio-Medical Electronics has increased its EBIT by 10.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Mindray Bio-Medical Electronics can strengthen its balance sheet over time. 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 Shenzhen Mindray Bio-Medical Electronics 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, Shenzhen Mindray Bio-Medical Electronics generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Mindray Bio-Medical Electronics has CN¥17.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥12b, being 86% of its EBIT. So we don't think Shenzhen Mindray Bio-Medical Electronics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Mindray Bio-Medical Electronics you should know about.

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.