We Think PW Medtech Group (HKG:1358) Can Manage Its Debt With Ease

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.' 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. As with many other companies PW Medtech Group Limited (HKG:1358) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 1358 is potentially undervalued!

What Is PW Medtech Group's Debt?

As you can see below, at the end of June 2022, PW Medtech Group had CN¥63.4m of debt, up from CN¥16.4m a year ago. Click the image for more detail. However, it does have CN¥1.45b in cash offsetting this, leading to net cash of CN¥1.39b.

How Strong Is PW Medtech Group's Balance Sheet?

We can see from the most recent balance sheet that PW Medtech Group had liabilities of CN¥225.7m falling due within a year, and liabilities of CN¥186.4m due beyond that. On the other hand, it had cash of CN¥1.45b and CN¥321.7m worth of receivables due within a year. So it actually has CN¥1.36b more liquid assets than total liabilities.

This surplus strongly suggests that PW Medtech Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PW Medtech Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, PW Medtech Group grew its EBIT by 308% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PW Medtech Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PW Medtech Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, PW Medtech Group actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case PW Medtech Group has CN¥1.39b in net cash and a strong balance sheet. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in CN¥100m. At the end of the day we're not concerned about PW Medtech Group's debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - PW Medtech Group has 2 warning signs we think you should be aware of.

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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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.