Is Cryofocus Medtech (Shanghai) (HKG:6922) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Cryofocus Medtech (Shanghai) Co., Ltd. (HKG:6922) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Cryofocus Medtech (Shanghai)

How Much Debt Does Cryofocus Medtech (Shanghai) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Cryofocus Medtech (Shanghai) had CN¥20.0m of debt, an increase on none, over one year. However, it does have CN¥69.6m in cash offsetting this, leading to net cash of CN¥49.6m.

How Strong Is Cryofocus Medtech (Shanghai)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cryofocus Medtech (Shanghai) had liabilities of CN¥46.1m due within 12 months and liabilities of CN¥12.5m due beyond that. On the other hand, it had cash of CN¥69.6m and CN¥131.0k worth of receivables due within a year. So it can boast CN¥11.1m more liquid assets than total liabilities.

Having regard to Cryofocus Medtech (Shanghai)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥1.74b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cryofocus Medtech (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cryofocus Medtech (Shanghai) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cryofocus Medtech (Shanghai) wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥42m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Cryofocus Medtech (Shanghai)?

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 Cryofocus Medtech (Shanghai) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥111m and booked a CN¥106m accounting loss. Given it only has net cash of CN¥49.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Cryofocus Medtech (Shanghai) that 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.