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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

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¥4.00b in debt in December 2024; about the same as the year before. But on the other hand it also has CN¥8.32b in cash, leading to a CN¥4.32b net cash position.

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¥6.08b falling due within a year, and liabilities of CN¥3.34b due beyond that. Offsetting this, it had CN¥8.32b in cash and CN¥8.20b in receivables that were due within 12 months. So it actually has CN¥7.10b more liquid assets than total liabilities.

This surplus suggests that Shandong Weigao Group Medical Polymer is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shandong Weigao Group Medical Polymer boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Shandong Weigao Group Medical Polymer

Fortunately, Shandong Weigao Group Medical Polymer grew its EBIT by 4.2% in the last year, making that debt load look even more manageable. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 73% 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 we empathize with investors who find debt concerning, you should keep in mind that Shandong Weigao Group Medical Polymer has net cash of CN¥4.32b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.1b, being 73% of its EBIT. So is Shandong Weigao Group Medical Polymer's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Shandong Weigao Group Medical Polymer has 1 warning sign we think you should be aware of.

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.