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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Intco Medical Technology Co., Ltd. (SZSE:300677) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Intco Medical Technology
How Much Debt Does Intco Medical Technology Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Intco Medical Technology had debt of CN¥5.31b, up from CN¥502.6m in one year. However, its balance sheet shows it holds CN¥10.3b in cash, so it actually has CN¥5.00b net cash.
How Healthy Is Intco Medical Technology's Balance Sheet?
The latest balance sheet data shows that Intco Medical Technology had liabilities of CN¥6.66b due within a year, and liabilities of CN¥2.30b falling due after that. Offsetting these obligations, it had cash of CN¥10.3b as well as receivables valued at CN¥966.5m due within 12 months. So it actually has CN¥2.31b more liquid assets than total liabilities.
This surplus suggests that Intco Medical Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Intco Medical Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Intco Medical Technology will need earnings to service that debt. 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 Intco Medical Technology had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥6.4b. That's not what we would hope to see.
So How Risky Is Intco Medical Technology?
Although Intco Medical Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥321m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Intco Medical Technology 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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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.