China Isotope & Radiation (HKG:1763) Has A Rock Solid Balance Sheet

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. Importantly, China Isotope & Radiation Corporation (HKG:1763) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Isotope & Radiation

How Much Debt Does China Isotope & Radiation Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 China Isotope & Radiation had CN¥1.64b of debt, an increase on CN¥804.7m, over one year. But on the other hand it also has CN¥3.15b in cash, leading to a CN¥1.50b net cash position.

How Healthy Is China Isotope & Radiation's Balance Sheet?

The latest balance sheet data shows that China Isotope & Radiation had liabilities of CN¥4.25b due within a year, and liabilities of CN¥1.80b falling due after that. Offsetting this, it had CN¥3.15b in cash and CN¥3.90b in receivables that were due within 12 months. So it can boast CN¥990.0m more liquid assets than total liabilities.

This surplus strongly suggests that China Isotope & Radiation has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Isotope & Radiation boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, China Isotope & Radiation grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Isotope & Radiation will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While China Isotope & Radiation has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, China Isotope & Radiation's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Isotope & Radiation has CN¥1.50b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 7.8% in the last twelve months. So is China Isotope & Radiation's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. 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 China Isotope & Radiation .

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.