China Isotope & Radiation (HKG:1763) Seems To Use Debt Quite Sensibly

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

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China Isotope & Radiation

What Is China Isotope & Radiation's Debt?

As you can see below, at the end of June 2021, China Isotope & Radiation had CN¥705.4m of debt, up from CN¥668.8m a year ago. Click the image for more detail. However, it does have CN¥2.53b in cash offsetting this, leading to net cash of CN¥1.82b.

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

Zooming in on the latest balance sheet data, we can see that China Isotope & Radiation had liabilities of CN¥2.98b due within 12 months and liabilities of CN¥931.1m due beyond that. Offsetting this, it had CN¥2.53b in cash and CN¥2.55b in receivables that were due within 12 months. So it actually has CN¥1.17b more liquid assets than total liabilities.

It's good to see that China Isotope & Radiation has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China Isotope & Radiation boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that China Isotope & Radiation has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 China Isotope & Radiation'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Isotope & Radiation 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 last three years, China Isotope & Radiation recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case China Isotope & Radiation has CN¥1.82b in net cash and a decent-looking balance sheet. And we liked the look of last year's 36% year-on-year EBIT growth. So is China Isotope & Radiation's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for China Isotope & Radiation you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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