These 4 Measures Indicate That Sisram Medical (HKG:1696) Is Using Debt Safely

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.' 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. As with many other companies Sisram Medical Ltd (HKG:1696) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sisram Medical

What Is Sisram Medical's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Sisram Medical had debt of US$5.74m, up from US$406.0k in one year. However, its balance sheet shows it holds US$148.7m in cash, so it actually has US$143.0m net cash.

How Healthy Is Sisram Medical's Balance Sheet?

The latest balance sheet data shows that Sisram Medical had liabilities of US$94.9m due within a year, and liabilities of US$37.9m falling due after that. On the other hand, it had cash of US$148.7m and US$71.8m worth of receivables due within a year. So it actually has US$87.7m 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.

In addition to that, we're happy to report that Sisram Medical has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sisram Medical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the most recent three years, Sisram Medical recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sisram Medical has US$143.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Sisram Medical's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Sisram Medical .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.