We Think MicroPort Scientific (HKG:853) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MicroPort Scientific

What Is MicroPort Scientific's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 MicroPort Scientific had debt of US$1.57b, up from US$1.29b in one year. However, it also had US$1.13b in cash, and so its net debt is US$435.8m.

A Look At MicroPort Scientific's Liabilities

The latest balance sheet data shows that MicroPort Scientific had liabilities of US$1.27b due within a year, and liabilities of US$1.26b falling due after that. Offsetting these obligations, it had cash of US$1.13b as well as receivables valued at US$239.6m due within 12 months. So it has liabilities totalling US$1.16b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.59b, 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. 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$951m, which is a gain of 13%, 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. Its EBIT loss was a whopping US$388m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$431m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for MicroPort Scientific that you should be aware of before investing here.

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.