Is Boji Medical TechnologyLtd (SZSE:300404) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Boji Medical Technology Co.,Ltd. (SZSE:300404) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Boji Medical TechnologyLtd

How Much Debt Does Boji Medical TechnologyLtd Carry?

As you can see below, Boji Medical TechnologyLtd had CN¥69.7m of debt at September 2024, down from CN¥122.2m a year prior. But on the other hand it also has CN¥281.7m in cash, leading to a CN¥212.1m net cash position.

How Strong Is Boji Medical TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Boji Medical TechnologyLtd had liabilities of CN¥417.8m falling due within a year, and liabilities of CN¥54.0m due beyond that. Offsetting this, it had CN¥281.7m in cash and CN¥277.8m in receivables that were due within 12 months. So it actually has CN¥87.7m more liquid assets than total liabilities.

This surplus suggests that Boji Medical TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Boji Medical TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Boji Medical TechnologyLtd has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Boji Medical TechnologyLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Boji Medical TechnologyLtd 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 last three years, Boji 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 Boji Medical TechnologyLtd has CN¥212.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 80% year-on-year EBIT growth. So we don't have any problem with Boji Medical TechnologyLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Boji Medical TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.