These 4 Measures Indicate That Shandong Weigao Group Medical Polymer (HKG:1066) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shandong Weigao Group Medical Polymer

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

The image below, which you can click on for greater detail, shows that Shandong Weigao Group Medical Polymer had debt of CN¥4.29b at the end of December 2020, a reduction from CN¥5.49b over a year. But on the other hand it also has CN¥5.98b in cash, leading to a CN¥1.69b net cash position.

A Look At Shandong Weigao Group Medical Polymer's Liabilities

We can see from the most recent balance sheet that Shandong Weigao Group Medical Polymer had liabilities of CN¥4.50b falling due within a year, and liabilities of CN¥4.45b due beyond that. Offsetting this, it had CN¥5.98b in cash and CN¥5.94b in receivables that were due within 12 months. So it actually has CN¥2.97b 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!

While Shandong Weigao Group Medical Polymer doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Looking at the most recent three years, Shandong Weigao Group Medical Polymer recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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¥1.69b, as well as more liquid assets than liabilities. So we don't think Shandong Weigao Group Medical Polymer's use of debt is risky. 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. 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.

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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