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 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 can see that Shanghai MicroPort Endovascular MedTech Co., Ltd. (SHSE:688016) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shanghai MicroPort Endovascular MedTech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shanghai MicroPort Endovascular MedTech had CN¥39.4m of debt, an increase on none, over one year. However, it does have CN¥1.05b in cash offsetting this, leading to net cash of CN¥1.01b.

How Healthy Is Shanghai MicroPort Endovascular MedTech's Balance Sheet?

The latest balance sheet data shows that Shanghai MicroPort Endovascular MedTech had liabilities of CN¥242.1m due within a year, and liabilities of CN¥61.5m falling due after that. Offsetting this, it had CN¥1.05b in cash and CN¥186.0m in receivables that were due within 12 months. So it actually has CN¥929.8m more liquid assets than total liabilities.

This surplus suggests that Shanghai MicroPort Endovascular MedTech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai MicroPort Endovascular MedTech boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shanghai MicroPort Endovascular MedTech has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. 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 Shanghai MicroPort Endovascular MedTech 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, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai MicroPort Endovascular MedTech 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. In the last three years, Shanghai MicroPort Endovascular MedTech's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai MicroPort Endovascular MedTech has CN¥1.01b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 54% over the last year. So we don't think Shanghai MicroPort Endovascular MedTech's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Shanghai MicroPort Endovascular MedTech .

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.