These 4 Measures Indicate That Shenzhen Mindray Bio-Medical Electronics (SZSE:300760) Is Using Debt Safely

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 Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Mindray Bio-Medical Electronics

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

As you can see below, at the end of March 2024, Shenzhen Mindray Bio-Medical Electronics had CN¥106.9m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥21.2b in cash, leading to a CN¥21.1b net cash position.

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

According to the last reported balance sheet, Shenzhen Mindray Bio-Medical Electronics had liabilities of CN¥11.1b due within 12 months, and liabilities of CN¥3.33b due beyond 12 months. On the other hand, it had cash of CN¥21.2b and CN¥4.02b worth of receivables due within a year. So it actually has CN¥10.8b 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. Simply put, the fact that Shenzhen Mindray Bio-Medical Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Shenzhen Mindray Bio-Medical Electronics grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Shenzhen Mindray Bio-Medical Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 85% 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¥21.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥10b. So is Shenzhen Mindray Bio-Medical Electronics's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Shenzhen Mindray Bio-Medical Electronics has 1 warning sign we think you should be aware of.

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.