MicroPort Scientific (HKG:853) Is Making Moderate Use Of Debt

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. We can see that MicroPort Scientific Corporation (HKG:853) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

What Is MicroPort Scientific's Net Debt?

As you can see below, MicroPort Scientific had US$1.60b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$827.8m in cash leading to net debt of about US$769.3m.

How Healthy Is MicroPort Scientific's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MicroPort Scientific had liabilities of US$1.18b due within 12 months and liabilities of US$1.31b due beyond that. On the other hand, it had cash of US$827.8m and US$313.6m worth of receivables due within a year. So it has liabilities totalling US$1.35b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.68b, so it does suggest shareholders should keep an eye on MicroPort Scientific's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for MicroPort Scientific

Over 12 months, MicroPort Scientific reported revenue of US$1.0b, which is a gain of 8.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, MicroPort Scientific had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$100m. 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$158m of cash over the last year. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how MicroPort Scientific's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.