Suzhou Basecare Medical (HKG:2170) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Suzhou Basecare Medical Corporation Limited (HKG:2170) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Suzhou Basecare Medical

What Is Suzhou Basecare Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Suzhou Basecare Medical had CN¥328.3m of debt, an increase on CN¥219.1m, over one year. However, its balance sheet shows it holds CN¥837.2m in cash, so it actually has CN¥508.8m net cash.

A Look At Suzhou Basecare Medical's Liabilities

Zooming in on the latest balance sheet data, we can see that Suzhou Basecare Medical had liabilities of CN¥198.2m due within 12 months and liabilities of CN¥326.9m due beyond that. On the other hand, it had cash of CN¥837.2m and CN¥160.0m worth of receivables due within a year. So it can boast CN¥472.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Suzhou Basecare Medical's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Suzhou Basecare Medical has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Suzhou Basecare Medical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Suzhou Basecare Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to CN¥247m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Suzhou Basecare Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Suzhou Basecare Medical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥375m of cash and made a loss of CN¥250m. However, it has net cash of CN¥508.8m, so it has a bit of time before it will need more capital. Suzhou Basecare Medical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Suzhou Basecare Medical is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.