Does Boai NKY Medical Holdings (SZSE:300109) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Boai NKY Medical Holdings Ltd. (SZSE:300109) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Boai NKY Medical Holdings

How Much Debt Does Boai NKY Medical Holdings Carry?

As you can see below, Boai NKY Medical Holdings had CN¥59.6m of debt at March 2024, down from CN¥70.5m a year prior. However, it does have CN¥282.9m in cash offsetting this, leading to net cash of CN¥223.4m.

How Healthy Is Boai NKY Medical Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Boai NKY Medical Holdings had liabilities of CN¥395.5m due within 12 months and liabilities of CN¥66.0m due beyond that. Offsetting these obligations, it had cash of CN¥282.9m as well as receivables valued at CN¥478.5m due within 12 months. So it actually has CN¥299.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Boai NKY Medical Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Boai NKY Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Boai NKY Medical Holdings grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Boai NKY Medical Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Boai NKY Medical Holdings 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, Boai NKY Medical Holdings recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Boai NKY Medical Holdings has CN¥223.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 18% over the last year. So we are not troubled with Boai NKY Medical Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Boai NKY Medical Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com