We Think Inner Mongolia Furui Medical Science (SZSE:300049) Can Manage Its Debt With Ease

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Inner Mongolia Furui Medical Science Co., Ltd. (SZSE:300049) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Inner Mongolia Furui Medical Science

What Is Inner Mongolia Furui Medical Science's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Inner Mongolia Furui Medical Science had debt of CN¥16.3m, up from CN¥1.16m in one year. However, its balance sheet shows it holds CN¥644.6m in cash, so it actually has CN¥628.4m net cash.

How Healthy Is Inner Mongolia Furui Medical Science's Balance Sheet?

We can see from the most recent balance sheet that Inner Mongolia Furui Medical Science had liabilities of CN¥301.3m falling due within a year, and liabilities of CN¥532.9m due beyond that. Offsetting these obligations, it had cash of CN¥644.6m as well as receivables valued at CN¥497.7m due within 12 months. So it can boast CN¥308.1m more liquid assets than total liabilities.

This surplus suggests that Inner Mongolia Furui Medical Science has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Inner Mongolia Furui Medical Science boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Inner Mongolia Furui Medical Science has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Inner Mongolia Furui Medical Science'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. While Inner Mongolia Furui Medical Science has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Inner Mongolia Furui Medical Science recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Inner Mongolia Furui Medical Science has CN¥628.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 33% year-on-year EBIT growth. So is Inner Mongolia Furui Medical Science's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Inner Mongolia Furui Medical Science's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.