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.' 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. We can see that MicroPort Scientific Corporation (HKG:853) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
What Is MicroPort Scientific's Net Debt?
As you can see below, at the end of December 2021, MicroPort Scientific had US$1.02b of debt, up from US$241.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.82b in cash, so it actually has US$795.2m net cash.
How Healthy Is MicroPort Scientific's Balance Sheet?
According to the last reported balance sheet, MicroPort Scientific had liabilities of US$546.8m due within 12 months, and liabilities of US$1.62b due beyond 12 months. Offsetting these obligations, it had cash of US$1.82b as well as receivables valued at US$242.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$100.5m.
Given MicroPort Scientific has a market capitalization of US$3.94b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, MicroPort Scientific also has more cash than debt, so we're pretty confident it can manage its debt safely. 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$779m, which is a gain of 20%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is MicroPort Scientific?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that MicroPort Scientific had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$505m of cash and made a loss of US$276m. With only US$795.2m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, MicroPort Scientific may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with MicroPort Scientific .
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.
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