Is Shanghai MicroPort MedBot (Group) (HKG:2252) Using Debt 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.' 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. As with many other companies Shanghai MicroPort MedBot (Group) Co., Ltd. (HKG:2252) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shanghai MicroPort MedBot (Group)

What Is Shanghai MicroPort MedBot (Group)'s Debt?

As you can see below, at the end of December 2023, Shanghai MicroPort MedBot (Group) had CN¥475.1m of debt, up from CN¥33.5m a year ago. Click the image for more detail. But it also has CN¥507.7m in cash to offset that, meaning it has CN¥32.7m net cash.

How Strong Is Shanghai MicroPort MedBot (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Shanghai MicroPort MedBot (Group) had liabilities of CN¥685.3m falling due within a year, and liabilities of CN¥240.9m due beyond that. On the other hand, it had cash of CN¥507.7m and CN¥55.7m worth of receivables due within a year. So it has liabilities totalling CN¥362.7m more than its cash and near-term receivables, combined.

Given Shanghai MicroPort MedBot (Group) has a market capitalization of CN¥11.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shanghai MicroPort MedBot (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Shanghai MicroPort MedBot (Group)'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.

Over 12 months, Shanghai MicroPort MedBot (Group) reported revenue of CN¥105m, which is a gain of 384%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Shanghai MicroPort MedBot (Group)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shanghai MicroPort MedBot (Group) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥1.0b accounting loss. Given it only has net cash of CN¥32.7m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Shanghai MicroPort MedBot (Group)'s revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Case in point: We've spotted 3 warning signs for Shanghai MicroPort MedBot (Group) you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.