Shandong Weigao Group Medical Polymer (HKG:1066) Seems To Use Debt Rather Sparingly

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.' 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 Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shandong Weigao Group Medical Polymer

What Is Shandong Weigao Group Medical Polymer's Net Debt?

As you can see below, Shandong Weigao Group Medical Polymer had CN¥4.35b of debt at June 2020, down from CN¥5.57b a year prior. But on the other hand it also has CN¥5.20b in cash, leading to a CN¥847.7m net cash position.

How Healthy Is Shandong Weigao Group Medical Polymer's Balance Sheet?

According to the last reported balance sheet, Shandong Weigao Group Medical Polymer had liabilities of CN¥3.87b due within 12 months, and liabilities of CN¥4.33b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.20b as well as receivables valued at CN¥5.08b due within 12 months. So it can boast CN¥2.08b more liquid assets than total liabilities.

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

And we also note warmly that Shandong Weigao Group Medical Polymer grew its EBIT by 11% last year, making its debt load easier to handle. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Shandong Weigao Group Medical Polymer recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Weigao Group Medical Polymer has net cash of CN¥847.7m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think Shandong Weigao Group Medical Polymer's use of debt is risky. We'd be very excited to see if Shandong Weigao Group Medical Polymer insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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