David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shinva Medical Instrument Co.,Ltd. (SHSE:600587) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Shinva Medical InstrumentLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Shinva Medical InstrumentLtd had CN¥982.8m of debt in September 2023, down from CN¥1.19b, one year before. However, it does have CN¥2.47b in cash offsetting this, leading to net cash of CN¥1.49b.
A Look At Shinva Medical InstrumentLtd's Liabilities
According to the last reported balance sheet, Shinva Medical InstrumentLtd had liabilities of CN¥6.48b due within 12 months, and liabilities of CN¥357.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.47b as well as receivables valued at CN¥2.35b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.01b.
Given Shinva Medical InstrumentLtd has a market capitalization of CN¥10.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shinva Medical InstrumentLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Shinva Medical InstrumentLtd grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shinva Medical InstrumentLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shinva Medical InstrumentLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Shinva Medical InstrumentLtd recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
Although Shinva Medical InstrumentLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.49b. And it impressed us with free cash flow of CN¥179m, being 83% of its EBIT. So is Shinva Medical InstrumentLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shinva Medical InstrumentLtd that you should be aware of before investing here.
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.
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.