Is Peijia Medical (HKG:9996) A Risky Investment?

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. We note that Peijia Medical Limited (HKG:9996) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Peijia Medical

What Is Peijia Medical's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Peijia Medical had debt of CN¥126.8m, up from none in one year. However, it does have CN¥1.74b in cash offsetting this, leading to net cash of CN¥1.62b.

How Strong Is Peijia Medical's Balance Sheet?

According to the last reported balance sheet, Peijia Medical had liabilities of CN¥578.0m due within 12 months, and liabilities of CN¥100.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.74b as well as receivables valued at CN¥75.9m due within 12 months. So it can boast CN¥1.14b more liquid assets than total liabilities.

This excess liquidity suggests that Peijia Medical is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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 ultimately the future profitability of the business will decide if Peijia Medical 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.

Over 12 months, Peijia Medical reported revenue of CN¥251m, which is a gain of 84%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Peijia Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Peijia Medical had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥579m and booked a CN¥408m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.62b. 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. Case in point: We've spotted 1 warning sign for Peijia Medical you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.