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 can see that OrbusNeich Medical Group Holdings Limited (HKG:6929) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for OrbusNeich Medical Group Holdings
What Is OrbusNeich Medical Group Holdings's Debt?
As you can see below, at the end of December 2023, OrbusNeich Medical Group Holdings had US$4.24m of debt, up from none a year ago. Click the image for more detail. However, it does have US$256.2m in cash offsetting this, leading to net cash of US$252.0m.
A Look At OrbusNeich Medical Group Holdings' Liabilities
According to the last reported balance sheet, OrbusNeich Medical Group Holdings had liabilities of US$35.6m due within 12 months, and liabilities of US$5.10m due beyond 12 months. Offsetting these obligations, it had cash of US$256.2m as well as receivables valued at US$46.4m due within 12 months. So it actually has US$261.9m more liquid assets than total liabilities.
This surplus liquidity suggests that OrbusNeich Medical Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that OrbusNeich Medical Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that OrbusNeich Medical Group Holdings has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. 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 OrbusNeich Medical Group Holdings 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. OrbusNeich Medical Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, OrbusNeich Medical Group Holdings recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that OrbusNeich Medical Group Holdings has net cash of US$252.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 65% year-on-year EBIT growth. The bottom line is that OrbusNeich Medical Group Holdings's use of debt is absolutely fine. 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. We've identified 1 warning sign with OrbusNeich Medical Group Holdings , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.