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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Shandong Weigao Group Medical Polymer Company Limited (HKG: 1066) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Shandong Weigao Group’s medical polymer
What is the debt of Shandong Weigao Group Medical Polymer?
The graph below, which you can click for more details, shows that Shandong Weigao Group Medical Polymer owed 4.45 billion yuan in debt as of June 2021; about the same as the year before. But it also has CN 7.05 billion in cash to compensate for this, which means it has CN 2.60 billion in net cash.
How healthy is Shandong Weigao Group Medical Polymer’s track record?
We can see from the most recent balance sheet that Shandong Weigao Group Medical Polymer had CN 5.58 billion liabilities due within one year, and CN 4.05 billion liabilities due within one year. -of the. On the other hand, he had CN 7.05 billion in cash and CN 6.20 billion in receivables due within one year. So he actually CN ¥ 3.61b Following liquid assets as total liabilities.
This short-term liquidity is a sign that Shandong Weigao Group Medical Polymer could probably repay its debt easily, as its balance sheet is far from tight. In short, Shandong Weigao Group Medical Polymer has net cash, so it’s fair to say it doesn’t have a lot of debt!
Fortunately, Shandong Weigao Group Medical Polymer has increased its EBIT by 9.9% in the past year, which makes this debt even more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Shandong Weigao Group Medical Polymer’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. Although Shandong Weigao Group Medical Polymer has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it builds up (or erodes) this cash balance. Over the past three years, Shandong Weigao Group Medical Polymer has generated strong free cash flow equivalent to 69% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
In summary
While it is always a good idea to investigate a company’s debt, in this case Shandong Weigao Group Medical Polymer has a net cash position of 2.60 billion yuan and a decent balance sheet. And it impressed us with free cash flow of CNN 2.0 billion, or 69% of its EBIT. So is Shandong Weigao Group Medical Polymer’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious place to start. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Shandong Weigao Group Medical Polymer shows 1 warning sign in our investment analysis , you must know…
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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