Is Cofoe Medical TechnologyLtd (SZSE:301087) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Cofoe Medical Technology Co.,Ltd. (SZSE:301087) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Cofoe Medical TechnologyLtd

How Much Debt Does Cofoe Medical TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Cofoe Medical TechnologyLtd had debt of CN¥647.1m, up from CN¥454.1m in one year. But it also has CN¥2.61b in cash to offset that, meaning it has CN¥1.96b net cash.

How Strong Is Cofoe Medical TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cofoe Medical TechnologyLtd had liabilities of CN¥1.16b due within 12 months and liabilities of CN¥317.8m due beyond that. On the other hand, it had cash of CN¥2.61b and CN¥562.6m worth of receivables due within a year. So it actually has CN¥1.70b more liquid assets than total liabilities.

It's good to see that Cofoe Medical TechnologyLtd 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. Succinctly put, Cofoe Medical TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Cofoe Medical TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cofoe Medical TechnologyLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cofoe Medical TechnologyLtd 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. Over the last three years, Cofoe Medical TechnologyLtd 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 it is always sensible to investigate a company's debt, in this case Cofoe Medical TechnologyLtd has CN¥1.96b in net cash and a decent-looking balance sheet. So we don't have any problem with Cofoe Medical TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Cofoe Medical TechnologyLtd (including 2 which are significant) .

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.