China Medical System Holdings (HKG: 867) could easily take on more debt
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. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies China Medical System Holdings Limited (HKG: 867) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest analysis for China Medical System Holdings
How much debt do the Chinese medical system’s wallets carry?
The image below, which you can click for more details, shows that in June 2021, China Medical System Holdings had a debt of CN 1.09 billion, compared to CN 694.0 million in one year. However, it has CNN 3.29 billion in cash offsetting this, which leads to a net cash position of CNN 2.20 billion.
How strong is China Medical System Holdings’ balance sheet?
The latest balance sheet data shows that China Medical System Holdings had CN 1.40 billion in debts due within one year, and CN 850.5 million in debts due thereafter. On the other hand, he had a cash position of CNN 3.29 billion and CNN 1.92 billion in receivables due within one year. So he actually CN Â¥ 2.95b Following liquid assets as total liabilities.
This short-term liquidity is a sign that China Medical System Holdings could likely repay its debt with ease, as its balance sheet is far from tight. In short, China Medical System Holdings has net cash, so it’s fair to say that it doesn’t have heavy debt!
Also positive, China Medical System Holdings has increased its EBIT by 24% over the past year, which should make it easier to repay debt going forward. The balance sheet is clearly the area you need to focus on when analyzing debt. 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 earnings forecast report interesting.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. 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 is always a good idea to investigate a company’s debt, in this case China Medical System Holdings has a net cash position of 2.20 billion yuan and a decent 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. We therefore do not believe that the use of debt by China Medical System Holdings is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Note that China Medical System Holdings displays 1 warning sign in our investment analysis , you must know…
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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