Does IVD Medical Holding (HKG:1931) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies IVD Medical Holding Limited (HKG:1931) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for IVD Medical Holding

What Is IVD Medical Holding's Net Debt?

As you can see below, at the end of June 2022, IVD Medical Holding had CN¥710.9m of debt, up from CN¥541.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥985.8m in cash, so it actually has CN¥274.9m net cash.

How Strong Is IVD Medical Holding's Balance Sheet?

The latest balance sheet data shows that IVD Medical Holding had liabilities of CN¥960.7m due within a year, and liabilities of CN¥501.0m falling due after that. Offsetting this, it had CN¥985.8m in cash and CN¥448.5m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to IVD Medical Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥2.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, IVD Medical Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that IVD Medical Holding has increased its EBIT by 4.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IVD Medical Holding 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. IVD Medical Holding 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, IVD Medical Holding recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about IVD Medical Holding's liabilities, but we can be reassured by the fact it has has net cash of CN¥274.9m. So is IVD Medical Holding'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. 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 2 warning signs for IVD Medical Holding (of which 1 is significant!) 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.

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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.