Amoy Diagnostics (SZSE:300685) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Amoy Diagnostics Co., Ltd. (SZSE:300685) does use debt in its business. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Amoy Diagnostics

What Is Amoy Diagnostics's Net Debt?

As you can see below, at the end of September 2024, Amoy Diagnostics had CN¥52.9m of debt, up from CN¥50.2m a year ago. Click the image for more detail. But it also has CN¥1.09b in cash to offset that, meaning it has CN¥1.03b net cash.

How Strong Is Amoy Diagnostics' Balance Sheet?

We can see from the most recent balance sheet that Amoy Diagnostics had liabilities of CN¥216.3m falling due within a year, and liabilities of CN¥10.8m due beyond that. On the other hand, it had cash of CN¥1.09b and CN¥601.0m worth of receivables due within a year. So it actually has CN¥1.46b more liquid assets than total liabilities.

This surplus suggests that Amoy Diagnostics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Amoy Diagnostics 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 Amoy Diagnostics has boosted its EBIT by 67%, 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 Amoy Diagnostics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Amoy Diagnostics 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, Amoy Diagnostics recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Amoy Diagnostics has CN¥1.03b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥289m, being 86% of its EBIT. The bottom line is that we do not find Amoy Diagnostics's debt levels at all concerning. Over time, share prices tend to follow earnings per share, so if you're interested in Amoy Diagnostics, you may well want to click here to check an interactive graph of its earnings per share history.

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.