Is Contec Medical SystemsLtd (SZSE:300869) Using Too Much Debt?

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.' 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 Contec Medical Systems Co.,Ltd (SZSE:300869) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Contec Medical SystemsLtd

How Much Debt Does Contec Medical SystemsLtd Carry?

As you can see below, Contec Medical SystemsLtd had CN¥805.1m of debt at September 2024, down from CN¥1.25b a year prior. However, its balance sheet shows it holds CN¥1.38b in cash, so it actually has CN¥572.1m net cash.

How Healthy Is Contec Medical SystemsLtd's Balance Sheet?

The latest balance sheet data shows that Contec Medical SystemsLtd had liabilities of CN¥173.4m due within a year, and liabilities of CN¥725.7m falling due after that. Offsetting these obligations, it had cash of CN¥1.38b as well as receivables valued at CN¥57.6m due within 12 months. So it can boast CN¥535.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Contec Medical SystemsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Contec Medical SystemsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Contec Medical SystemsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Contec Medical SystemsLtd had a loss before interest and tax, and actually shrunk its revenue by 47%, to CN¥464m. That makes us nervous, to say the least.

So How Risky Is Contec Medical SystemsLtd?

While Contec Medical SystemsLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥9.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Contec Medical SystemsLtd has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.