Is C-MER Medical Holdings (HKG:3309) A Risky Investment?

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.' 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. We note that C-MER Medical Holdings Limited (HKG:3309) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for C-MER Medical Holdings

What Is C-MER Medical Holdings's Debt?

The image below, which you can click on for greater detail, shows that C-MER Medical Holdings had debt of HK$20.9m at the end of June 2024, a reduction from HK$34.1m over a year. But on the other hand it also has HK$512.4m in cash, leading to a HK$491.5m net cash position.

How Strong Is C-MER Medical Holdings' Balance Sheet?

According to the last reported balance sheet, C-MER Medical Holdings had liabilities of HK$362.3m due within 12 months, and liabilities of HK$411.1m due beyond 12 months. Offsetting this, it had HK$512.4m in cash and HK$90.7m in receivables that were due within 12 months. So it has liabilities totalling HK$170.3m more than its cash and near-term receivables, combined.

Given C-MER Medical Holdings has a market capitalization of HK$2.83b, 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. Despite its noteworthy liabilities, C-MER Medical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that C-MER Medical Holdings grew its EBIT by 763% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 C-MER Medical Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While C-MER Medical Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, C-MER Medical Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about C-MER Medical Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$491.5m. And it impressed us with free cash flow of HK$146m, being 192% of its EBIT. So we don't think C-MER Medical Holdings's use of debt is risky. We'd be very excited to see if C-MER Medical Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.