We Think IVD Medical Holding (HKG:1931) Can Manage Its Debt With Ease

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.' 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. We note that IVD Medical Holding Limited (HKG:1931) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is IVD Medical Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 IVD Medical Holding had CN¥732.6m of debt, an increase on CN¥319.9m, over one year. However, its balance sheet shows it holds CN¥1.80b in cash, so it actually has CN¥1.07b net cash.

How Strong Is IVD Medical Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IVD Medical Holding had liabilities of CN¥1.55b due within 12 months and liabilities of CN¥216.0m due beyond that. Offsetting this, it had CN¥1.80b in cash and CN¥485.9m in receivables that were due within 12 months. So it actually has CN¥522.5m more liquid assets than total liabilities.

This short term liquidity is a sign that IVD Medical Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, IVD Medical Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for IVD Medical Holding

Also good is that IVD Medical Holding grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, IVD Medical Holding's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case IVD Medical Holding has CN¥1.07b in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So we don't think IVD Medical Holding'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. Be aware that IVD Medical Holding is showing 1 warning sign in our investment analysis , 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.