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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Sisram Medical Ltd (HKG:1696) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sisram Medical

What Is Sisram Medical's Net Debt?

As you can see below, Sisram Medical had US$4.78m of debt at June 2023, down from US$5.74m a year prior. But on the other hand it also has US$62.6m in cash, leading to a US$57.8m 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$92.6m falling due within a year, and liabilities of US$56.3m due beyond that. Offsetting these obligations, it had cash of US$62.6m as well as receivables valued at US$83.8m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Sisram Medical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$351.0m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Sisram Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Sisram Medical saw its EBIT drop by 5.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Sisram Medical'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. 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 12% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Sisram Medical has US$57.8m in net cash. So we don't have any problem with Sisram Medical's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Sisram Medical , and understanding them should be part of your investment process.

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.