Is Link-Asia International MedTech Group (HKG:1143) Using Debt In A Risky Way?

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 Link-Asia International MedTech Group Limited (HKG:1143) does use debt in its business. But is this debt a concern to shareholders?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Link-Asia International MedTech Group

What Is Link-Asia International MedTech Group's Debt?

As you can see below, at the end of June 2021, Link-Asia International MedTech Group had HK$20.6m of debt, up from HK$17.7m a year ago. Click the image for more detail. However, it does have HK$209.7m in cash offsetting this, leading to net cash of HK$189.1m.

How Healthy Is Link-Asia International MedTech Group's Balance Sheet?

According to the last reported balance sheet, Link-Asia International MedTech Group had liabilities of HK$339.3m due within 12 months, and liabilities of HK$9.04m due beyond 12 months. Offsetting this, it had HK$209.7m in cash and HK$164.5m in receivables that were due within 12 months. So it can boast HK$25.9m more liquid assets than total liabilities.

This excess liquidity suggests that Link-Asia International MedTech Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Link-Asia International MedTech Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Link-Asia International MedTech Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Link-Asia International MedTech Group wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to HK$660m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Link-Asia International MedTech Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Link-Asia International MedTech Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$50m of cash and made a loss of HK$135m. But the saving grace is the HK$189.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Link-Asia International MedTech Group (of which 1 is significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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