Does MicroPort Scientific (HKG:853) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, MicroPort Scientific Corporation (HKG:853) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 MicroPort Scientific

What Is MicroPort Scientific's Net Debt?

As you can see below, at the end of June 2024, MicroPort Scientific had US$1.56b of debt, up from US$1.42b a year ago. Click the image for more detail. However, it also had US$1.04b in cash, and so its net debt is US$527.7m.

How Healthy Is MicroPort Scientific's Balance Sheet?

The latest balance sheet data shows that MicroPort Scientific had liabilities of US$910.3m due within a year, and liabilities of US$1.60b falling due after that. Offsetting these obligations, it had cash of US$1.04b as well as receivables valued at US$290.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.18b.

This deficit is considerable relative to its market capitalization of US$1.43b, so it does suggest shareholders should keep an eye on MicroPort Scientific's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MicroPort Scientific 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.

Over 12 months, MicroPort Scientific reported revenue of US$1.0b, which is a gain of 12%, 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.

Caveat Emptor

Over the last twelve months MicroPort Scientific produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$252m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$269m of cash over the last year. So in short it's a really risky stock. 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. Be aware that MicroPort Scientific is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.