We Think China Resources Medical Holdings (HKG:1515) 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. We note that China Resources Medical Holdings Company Limited (HKG:1515) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China Resources Medical Holdings

What Is China Resources Medical Holdings's Net Debt?

As you can see below, China Resources Medical Holdings had CN¥1.74b of debt at June 2022, down from CN¥1.90b a year prior. However, its balance sheet shows it holds CN¥2.63b in cash, so it actually has CN¥891.6m net cash.

How Strong Is China Resources Medical Holdings' Balance Sheet?

According to the last reported balance sheet, China Resources Medical Holdings had liabilities of CN¥2.67b due within 12 months, and liabilities of CN¥1.12b due beyond 12 months. On the other hand, it had cash of CN¥2.63b and CN¥1.13b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that China Resources Medical Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.85b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, China Resources Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that China Resources Medical Holdings grew its EBIT by 14% last year, making its debt load easier to handle. 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 China Resources Medical Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Resources Medical Holdings 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. Over the last three years, China Resources Medical Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that China Resources Medical Holdings has CN¥891.6m in net cash. And it impressed us with free cash flow of CN¥403m, being 106% of its EBIT. So we don't think China Resources Medical Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for China Resources Medical Holdings you should be aware of.

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.