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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that China Isotope & Radiation Corporation (HKG:1763) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Isotope & Radiation

What Is China Isotope & Radiation's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 China Isotope & Radiation had CN¥739.1m of debt, an increase on CN¥705.4m, over one year. However, its balance sheet shows it holds CN¥2.64b in cash, so it actually has CN¥1.90b net cash.

A Look At China Isotope & Radiation's Liabilities

Zooming in on the latest balance sheet data, we can see that China Isotope & Radiation had liabilities of CN¥4.24b due within 12 months and liabilities of CN¥510.3m due beyond that. Offsetting this, it had CN¥2.64b in cash and CN¥3.23b in receivables that were due within 12 months. So it can boast CN¥1.12b more liquid assets than total liabilities.

This surplus suggests that China Isotope & Radiation is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues 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!

And we also note warmly that China Isotope & Radiation grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 created free cash flow amounting to 14% 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 we empathize with investors who find debt concerning, you should keep in mind that China Isotope & Radiation has net cash of CN¥1.90b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 15% in the last twelve months. So is China Isotope & Radiation's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that China Isotope & Radiation insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.