Stock Analysis

Is MicroPort Scientific (HKG:853) Using Debt Sensibly?

SEHK:853
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, MicroPort Scientific Corporation (HKG:853) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at 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 December 2022, MicroPort Scientific had US$1.29b of debt, up from US$1.02b a year ago. Click the image for more detail. However, it does have US$1.34b in cash offsetting this, leading to net cash of US$47.7m.

debt-equity-history-analysis
SEHK:853 Debt to Equity History June 11th 2023

How Healthy Is MicroPort Scientific's Balance Sheet?

We can see from the most recent balance sheet that MicroPort Scientific had liabilities of US$662.1m falling due within a year, and liabilities of US$1.54b due beyond that. Offsetting these obligations, it had cash of US$1.34b as well as receivables valued at US$186.8m due within 12 months. So it has liabilities totalling US$675.4m more than its cash and near-term receivables, combined.

MicroPort Scientific has a market capitalization of US$3.27b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, MicroPort Scientific 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 ultimately the future profitability of the business will decide if MicroPort Scientific can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, MicroPort Scientific reported revenue of US$841m, which is a gain of 8.0%, 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.

So How Risky Is MicroPort Scientific?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MicroPort Scientific had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$601m of cash and made a loss of US$437m. Given it only has net cash of US$47.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for MicroPort Scientific that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.