MicroPort Scientific (HKG:853) Has Debt But No Earnings; Should You Worry?

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 MicroPort Scientific Corporation (HKG:853) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MicroPort Scientific

What Is MicroPort Scientific's Net Debt?

As you can see below, at the end of June 2021, MicroPort Scientific had US$898.3m of debt, up from US$358.8m a year ago. Click the image for more detail. However, it does have US$1.74b in cash offsetting this, leading to net cash of US$839.8m.

How Strong Is MicroPort Scientific's Balance Sheet?

We can see from the most recent balance sheet that MicroPort Scientific had liabilities of US$356.7m falling due within a year, and liabilities of US$1.07b due beyond that. Offsetting this, it had US$1.74b in cash and US$210.6m in receivables that were due within 12 months. So it actually has US$517.8m more liquid assets than total liabilities.

This short term liquidity is a sign that MicroPort Scientific could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MicroPort Scientific has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MicroPort Scientific's ability to maintain a healthy balance sheet going forward. 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$726m, which is a gain of 2.6%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MicroPort Scientific lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$260m and booked a US$216m accounting loss. With only US$839.8m on the balance sheet, it would appear that its going to need to raise capital again 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for MicroPort Scientific you should be aware of.

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.

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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