Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Shenzhen Mindray Bio-Medical Electronics Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Mindray Bio-Medical Electronics had CN¥106.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥21.2b in cash, so it actually has CN¥21.1b net cash.
How Healthy Is Shenzhen Mindray Bio-Medical Electronics' Balance Sheet?
The latest balance sheet data shows that Shenzhen Mindray Bio-Medical Electronics had liabilities of CN¥11.1b due within a year, and liabilities of CN¥3.33b falling due after that. On the other hand, it had cash of CN¥21.2b and CN¥4.02b worth of receivables due within a year. So it can boast CN¥10.8b more liquid assets than total liabilities.
This surplus suggests that Shenzhen Mindray Bio-Medical Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Mindray Bio-Medical Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Shenzhen Mindray Bio-Medical Electronics grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Mindray Bio-Medical Electronics 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Mindray Bio-Medical Electronics 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, Shenzhen Mindray Bio-Medical Electronics generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shenzhen Mindray Bio-Medical Electronics has CN¥21.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥10b. So is Shenzhen Mindray Bio-Medical Electronics'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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Mindray Bio-Medical Electronics .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.