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. As with many other companies OrbusNeich Medical Group Holdings Limited (HKG:6929) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is OrbusNeich Medical Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 OrbusNeich Medical Group Holdings had debt of US$4.24m, up from none in one year. But it also has US$261.2m in cash to offset that, meaning it has US$257.0m net cash.

How Strong Is OrbusNeich Medical Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that OrbusNeich Medical Group Holdings had liabilities of US$35.9m falling due within a year, and liabilities of US$5.76m due beyond that. Offsetting this, it had US$261.2m in cash and US$37.6m in receivables that were due within 12 months. So it actually has US$257.2m more liquid assets than total liabilities.

This luscious liquidity implies that OrbusNeich Medical Group Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, OrbusNeich Medical Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, OrbusNeich Medical Group Holdings saw its EBIT drop by 5.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine OrbusNeich Medical Group Holdings's ability to maintain a healthy balance sheet going forward. 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. 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. In the last three years, OrbusNeich Medical Group Holdings's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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$257.0m, as well as more liquid assets than liabilities. So we don't think OrbusNeich Medical Group Holdings's use of debt is risky. 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. For instance, we've identified 2 warning signs for OrbusNeich Medical Group Holdings that you should be aware of.

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.

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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.