Does Peijia Medical (HKG:9996) Have A Healthy Balance Sheet?

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?

When Is Debt A Problem?

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. 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.

See our latest analysis for Peijia Medical

What Is Peijia Medical's Debt?

As you can see below, at the end of June 2023, Peijia Medical had CN¥184.1m of debt, up from CN¥65.0m a year ago. Click the image for more detail. But it also has CN¥1.07b in cash to offset that, meaning it has CN¥884.9m net cash.

A Look At Peijia Medical's Liabilities

According to the last reported balance sheet, Peijia Medical had liabilities of CN¥158.6m due within 12 months, and liabilities of CN¥225.6m due beyond 12 months. On the other hand, it had cash of CN¥1.07b and CN¥84.9m worth of receivables due within a year. So it can boast CN¥769.7m more liquid assets than total liabilities.

This excess liquidity suggests that Peijia Medical is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Peijia Medical 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 Peijia Medical'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, Peijia Medical reported revenue of CN¥357m, which is a gain of 75%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Peijia Medical?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Peijia Medical lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥942m of cash and made a loss of CN¥528m. But the saving grace is the CN¥884.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Peijia Medical's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often 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 instance, we've identified 1 warning sign for Peijia Medical that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.