Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Shenzhen Mindray Bio-Medical Electronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Mindray Bio-Medical Electronics had debt of CN¥121.7m, up from none in one year. But it also has CN¥17.7b in cash to offset that, meaning it has CN¥17.5b net cash.

How Healthy Is Shenzhen Mindray Bio-Medical Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Mindray Bio-Medical Electronics had liabilities of CN¥11.6b due within 12 months and liabilities of CN¥4.03b due beyond that. Offsetting this, it had CN¥17.7b in cash and CN¥3.84b in receivables that were due within 12 months. So it can boast CN¥5.91b more liquid assets than total liabilities.

This state of affairs indicates that Shenzhen Mindray Bio-Medical Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥317.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shenzhen Mindray Bio-Medical Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Shenzhen Mindray Bio-Medical Electronics has increased its EBIT by 10.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Mindray Bio-Medical Electronics'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Mindray Bio-Medical Electronics 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. During the last three years, Shenzhen Mindray Bio-Medical Electronics generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Mindray Bio-Medical Electronics has CN¥17.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥12b, being 86% of its EBIT. So is Shenzhen Mindray Bio-Medical Electronics's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Mindray Bio-Medical Electronics 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.