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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, 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.

Check out our latest analysis for Shandong Weigao Group Medical Polymer

What Is Shandong Weigao Group Medical Polymer's Debt?

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.

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

We can see from the most recent balance sheet that Shandong Weigao Group Medical Polymer had liabilities of CN¥5.58b falling due within a year, and liabilities of CN¥4.05b due beyond that. On the other hand, it had cash of CN¥7.05b and CN¥6.20b worth of receivables due within a year. So it actually has CN¥3.61b 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. Succinctly put, Shandong Weigao Group Medical Polymer boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Shandong Weigao Group Medical Polymer grew its EBIT by 9.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. 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 cold hard cash means it can reduce its debt when it wants to.

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. And it impressed us with free cash flow of CN¥2.0b, being 69% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shandong Weigao Group Medical Polymer is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.