Jinhai Medical Technology (HKG:2225) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Jinhai Medical Technology Limited (HKG:2225) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jinhai Medical Technology

How Much Debt Does Jinhai Medical Technology Carry?

As you can see below, at the end of June 2024, Jinhai Medical Technology had S$7.47m of debt, up from S$1.87m a year ago. Click the image for more detail. However, it does have S$17.7m in cash offsetting this, leading to net cash of S$10.2m.

How Healthy Is Jinhai Medical Technology's Balance Sheet?

The latest balance sheet data shows that Jinhai Medical Technology had liabilities of S$24.1m due within a year, and liabilities of S$3.05m falling due after that. On the other hand, it had cash of S$17.7m and S$16.7m worth of receivables due within a year. So it can boast S$7.27m more liquid assets than total liabilities.

Having regard to Jinhai Medical Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$1.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jinhai Medical Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jinhai Medical Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jinhai Medical Technology reported revenue of S$60m, which is a gain of 205%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Jinhai Medical Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jinhai Medical Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of S$1.6m and booked a S$10m accounting loss. With only S$10.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Jinhai Medical Technology's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Jinhai Medical Technology .

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.