Shandong Weigao Group Medical Polymer (HKG:1066) Has A Rock Solid Balance Sheet

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. Importantly, Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shandong Weigao Group Medical Polymer

How Much Debt Does Shandong Weigao Group Medical Polymer Carry?

The chart below, which you can click on for greater detail, shows that Shandong Weigao Group Medical Polymer had CN¥4.45b in debt in June 2021; about the same as the year before. But it also has CN¥7.05b in cash to offset that, meaning it has CN¥2.60b net cash.

A Look At Shandong Weigao Group Medical Polymer's Liabilities

The latest balance sheet data shows that Shandong Weigao Group Medical Polymer had liabilities of CN¥5.58b due within a year, and liabilities of CN¥4.05b falling due after that. Offsetting this, it had CN¥7.05b in cash and CN¥6.59b in receivables that were due within 12 months. So it actually has CN¥4.00b more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Weigao Group Medical Polymer could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shandong Weigao Group Medical Polymer has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Shandong Weigao Group Medical Polymer grew its EBIT at 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Weigao Group Medical Polymer'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 Shandong Weigao Group Medical Polymer 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. During the last three years, Shandong Weigao Group Medical Polymer produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. 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 Shandong Weigao Group Medical Polymer has CN¥2.60b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥2.0b. So is Shandong Weigao Group Medical Polymer's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shandong Weigao Group Medical Polymer 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.
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