Despite Lacking Profits Peijia Medical (HKG:9996) Seems To Be On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Peijia Medical Limited (HKG:9996) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Peijia Medical

What Is Peijia Medical's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Peijia Medical had debt of CN¥65.0m, up from none in one year. But it also has CN¥1.89b in cash to offset that, meaning it has CN¥1.82b net cash.

How Strong Is Peijia Medical's Balance Sheet?

According to the last reported balance sheet, Peijia Medical had liabilities of CN¥170.6m due within 12 months, and liabilities of CN¥39.4m due beyond 12 months. Offsetting this, it had CN¥1.89b in cash and CN¥63.4m in receivables that were due within 12 months. So it actually has CN¥1.74b more liquid assets than total liabilities.

This surplus strongly suggests that Peijia Medical has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Peijia Medical has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Peijia Medical's ability to maintain a healthy balance sheet going forward. 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, Peijia Medical reported revenue of CN¥204m, which is a gain of 168%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Peijia Medical?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Peijia Medical had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥790m of cash and made a loss of CN¥491m. But the saving grace is the CN¥1.82b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Peijia Medical has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Peijia Medical has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.