Is Sisram Medical (HKG:1696) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sisram Medical Ltd (HKG:1696) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sisram Medical

What Is Sisram Medical's Debt?

You can click the graphic below for the historical numbers, but it shows that Sisram Medical had US$5.74m of debt in December 2022, down from US$7.29m, one year before. But on the other hand it also has US$81.5m in cash, leading to a US$75.8m net cash position.

How Strong Is Sisram Medical's Balance Sheet?

We can see from the most recent balance sheet that Sisram Medical had liabilities of US$80.1m falling due within a year, and liabilities of US$43.3m due beyond that. On the other hand, it had cash of US$81.5m and US$80.4m worth of receivables due within a year. So it can boast US$38.6m more liquid assets than total liabilities.

This surplus suggests that Sisram Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sisram Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Sisram Medical grew its EBIT by 6.2% in the last year, making that debt load look even more manageable. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Sisram Medical recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Sisram Medical has net cash of US$75.8m, as well as more liquid assets than liabilities. So is Sisram Medical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 Sisram Medical you should know about.

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.