Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. 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 can see that China Medical System Holdings Limited (HKG: 867) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for China Medical System Holdings
What is the debt of China Medical System Holdings?
You can click on the graph below for historical figures, but it shows that in June 2021, China Medical System Holdings had a debt of CN 1.09 billion, an increase from CN 694.0 million. , over one year. However, it has CN ¥ 3.29b in cash offsetting this, leading to net cash of CN ¥ 2.20b.
A look at the liabilities of China Medical System Holdings
The latest balance sheet data shows China Medical System Holdings had CN 1.40 billion in liabilities due within one year, and CN 850.5 million in liabilities due after that. On the other hand, he had CN 3.29 billion in cash and CNN 1.92 billion in receivables due within one year. So he can boast of having more CN ¥ 2.95b of liquid assets than total Liabilities.
This surplus suggests that China Medical System Holdings has a prudent balance sheet and could likely eliminate its debt without too much difficulty. In short, China Medical System Holdings has clear cash flow, so it’s fair to say it doesn’t have heavy debt!
Another good sign is that China Medical System Holdings was able to increase its EBIT by 24% in twelve months, making it easier to pay off debt. 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 China Medical System Holdings’ 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 needs free cash flow to pay off debts; accounting profits are not enough. Although China Medical System Holdings 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 is. this cash balance is built (or eroded). Over the past three years, China Medical System Holdings has recorded free cash flow totaling 86% of its EBIT, which is higher than what we usually expected. This positions it well to repay debt if it is desirable.
While it’s always a good idea to investigate a company’s debt, in this case China Medical System Holdings has 2.20 billion yen in net cash and a decent-looking balance sheet. The icing on the cake was that he converted 86% of that EBIT into free cash flow, which brought in 2.4 billion yen. So is the debt of China Medical System Holdings a risk? It does not seem to us. We would be very happy to see if the insiders of China Medical System Holdings bought any shares. If you are too, click this link now to take a (free) look at our list of reported insider trades.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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