Is Venus Medtech (Hangzhou) (HKG:2500) Using Debt In A Risky Way?

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.' 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. Importantly, Venus Medtech (Hangzhou) Inc. (HKG:2500) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Venus Medtech (Hangzhou)

How Much Debt Does Venus Medtech (Hangzhou) Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Venus Medtech (Hangzhou) had debt of CN¥796.0m, up from CN¥4.90m in one year. However, its balance sheet shows it holds CN¥1.88b in cash, so it actually has CN¥1.08b net cash.

A Look At Venus Medtech (Hangzhou)'s Liabilities

According to the last reported balance sheet, Venus Medtech (Hangzhou) had liabilities of CN¥492.1m due within 12 months, and liabilities of CN¥1.16b due beyond 12 months. Offsetting this, it had CN¥1.88b in cash and CN¥384.1m in receivables that were due within 12 months. So it actually has CN¥612.0m more liquid assets than total liabilities.

This excess liquidity suggests that Venus Medtech (Hangzhou) is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Venus Medtech (Hangzhou) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Venus Medtech (Hangzhou) had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥406m. That's not what we would hope to see.

So How Risky Is Venus Medtech (Hangzhou)?

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 Venus Medtech (Hangzhou) lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥908m of cash and made a loss of CN¥1.1b. But the saving grace is the CN¥1.08b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. For riskier companies like Venus Medtech (Hangzhou) I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.