Is Sisram Medical (HKG:1696) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sisram Medical Ltd (HKG:1696) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sisram Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Sisram Medical had US$4.80m of debt, an increase on US$4.42m, over one year. However, it does have US$72.0m in cash offsetting this, leading to net cash of US$67.2m.

A Look At Sisram Medical's Liabilities

According to the last reported balance sheet, Sisram Medical had liabilities of US$95.5m due within 12 months, and liabilities of US$47.0m due beyond 12 months. On the other hand, it had cash of US$72.0m and US$80.8m worth of receivables due within a year. So it actually has US$10.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Sisram Medical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sisram Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Sisram Medical

In fact Sisram Medical's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Sisram Medical'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. Sisram Medical 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. In the last three years, Sisram Medical created free cash flow amounting to 7.3% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sisram Medical has net cash of US$67.2m, as well as more liquid assets than liabilities. So we don't have any problem with Sisram Medical's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Sisram Medical's earnings per share history for free.

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.