Is Venus Medtech (Hangzhou) (HKG:2500) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Venus Medtech (Hangzhou) Inc. (HKG:2500) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Venus Medtech (Hangzhou)

What Is Venus Medtech (Hangzhou)'s Net Debt?

As you can see below, Venus Medtech (Hangzhou) had CN¥778.7m of debt at June 2023, down from CN¥924.7m a year prior. However, its balance sheet shows it holds CN¥1.45b in cash, so it actually has CN¥674.5m net cash.

How Healthy Is Venus Medtech (Hangzhou)'s Balance Sheet?

The latest balance sheet data shows that Venus Medtech (Hangzhou) had liabilities of CN¥633.3m due within a year, and liabilities of CN¥1.05b falling due after that. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥401.6m due within 12 months. So it actually has CN¥176.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Venus Medtech (Hangzhou) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Venus Medtech (Hangzhou) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Venus Medtech (Hangzhou)'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, Venus Medtech (Hangzhou) reported revenue of CN¥452m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Venus Medtech (Hangzhou)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Venus Medtech (Hangzhou) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥839m and booked a CN¥1.2b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥674.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Venus Medtech (Hangzhou) has 1 warning sign we think you should be aware of.

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.