Is BMC Medical (SZSE:301367) A Risky Investment?

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. As with many other companies BMC Medical Co., Ltd. (SZSE:301367) makes use of debt. But the more important question is: how much risk is that debt creating?

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is BMC Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 BMC Medical had CN¥30.0m of debt, an increase on none, over one year. But it also has CN¥2.64b in cash to offset that, meaning it has CN¥2.61b net cash.

How Healthy Is BMC Medical's Balance Sheet?

According to the last reported balance sheet, BMC Medical had liabilities of CN¥424.3m due within 12 months, and liabilities of CN¥12.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.64b as well as receivables valued at CN¥183.6m due within 12 months. So it can boast CN¥2.39b more liquid assets than total liabilities.

This luscious liquidity implies that BMC Medical's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, BMC Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for BMC Medical

In fact BMC Medical's saving grace is its low debt levels, because its EBIT has tanked 73% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BMC Medical'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BMC Medical 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. During the last three years, BMC Medical generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case BMC Medical has CN¥2.61b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥226m, being 91% of its EBIT. So we don't think BMC Medical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with BMC Medical .

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.