Is Jiangsu Yahong Meditech (SHSE:688176) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Jiangsu Yahong Meditech Co., Ltd. (SHSE:688176) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Yahong Meditech

What Is Jiangsu Yahong Meditech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Yahong Meditech had CN¥66.2m of debt, an increase on CN¥33.8m, over one year. However, it does have CN¥1.52b in cash offsetting this, leading to net cash of CN¥1.45b.

A Look At Jiangsu Yahong Meditech's Liabilities

We can see from the most recent balance sheet that Jiangsu Yahong Meditech had liabilities of CN¥177.9m falling due within a year, and liabilities of CN¥56.3m due beyond that. On the other hand, it had cash of CN¥1.52b and CN¥55.7m worth of receivables due within a year. So it actually has CN¥1.34b more liquid assets than total liabilities.

This surplus strongly suggests that Jiangsu Yahong Meditech has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Jiangsu Yahong Meditech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Yahong Meditech'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.

In the last year Jiangsu Yahong Meditech wasn't profitable at an EBIT level, but managed to grow its revenue by 4,882%, to CN¥150m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Jiangsu Yahong Meditech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Jiangsu Yahong Meditech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥452m of cash and made a loss of CN¥403m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.45b. That means it could keep spending at its current rate for more than two years. Importantly, Jiangsu Yahong Meditech's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangsu Yahong Meditech you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.