OrbusNeich Medical Group Holdings (HKG:6929) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that OrbusNeich Medical Group Holdings Limited (HKG:6929) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OrbusNeich Medical Group Holdings

What Is OrbusNeich Medical Group Holdings's Net Debt?

As you can see below, at the end of June 2024, OrbusNeich Medical Group Holdings had US$4.24m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$261.2m in cash, leading to a US$257.0m net cash position.

A Look At OrbusNeich Medical Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that OrbusNeich Medical Group Holdings had liabilities of US$35.9m due within 12 months and liabilities of US$5.76m due beyond that. Offsetting these obligations, it had cash of US$261.2m as well as receivables valued at US$37.6m due within 12 months. So it actually has US$257.2m more liquid assets than total liabilities.

This surplus strongly suggests that OrbusNeich Medical Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that OrbusNeich Medical Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that OrbusNeich Medical Group Holdings saw its EBIT decline by 5.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine OrbusNeich Medical Group Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. OrbusNeich Medical Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, OrbusNeich Medical Group Holdings recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that OrbusNeich Medical Group Holdings has net cash of US$257.0m, as well as more liquid assets than liabilities. So is OrbusNeich Medical Group Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for OrbusNeich Medical Group Holdings 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.