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.' 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. Importantly, Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Shandong Weigao Group Medical Polymer
What Is Shandong Weigao Group Medical Polymer's Net Debt?
As you can see below, Shandong Weigao Group Medical Polymer had CN¥4.00b of debt at June 2024, down from CN¥4.20b a year prior. But on the other hand it also has CN¥7.87b in cash, leading to a CN¥3.86b net cash position.
How Strong Is Shandong Weigao Group Medical Polymer's Balance Sheet?
The latest balance sheet data shows that Shandong Weigao Group Medical Polymer had liabilities of CN¥5.96b due within a year, and liabilities of CN¥3.95b falling due after that. Offsetting these obligations, it had cash of CN¥7.87b as well as receivables valued at CN¥8.00b due within 12 months. So it actually has CN¥5.95b more liquid assets than total liabilities.
This surplus liquidity suggests that Shandong Weigao Group Medical Polymer's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Shandong Weigao Group Medical Polymer has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Shandong Weigao Group Medical Polymer's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shandong Weigao Group Medical Polymer 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shandong Weigao Group Medical Polymer 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. During the last three years, Shandong Weigao Group Medical Polymer produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Shandong Weigao Group Medical Polymer has net cash of CN¥3.86b, as well as more liquid assets than liabilities. So is Shandong Weigao Group Medical Polymer'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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shandong Weigao Group Medical Polymer you should know about.
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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