These 4 measures indicate that Sisram Medical (HKG:1696) uses debt safely
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 synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Sisram Medical Ltd (HKG:1696) uses debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Sisram Medical
What is Sisram Medical’s net debt?
The image below, which you can click on for more details, shows that as of June 2022, Sisram Medical had $5.74 million in debt, up from $406,000 in one year. However, his balance sheet shows he holds $148.7 million in cash, so he actually has $143.0 million in net cash.
How healthy is Sisram Medical’s balance sheet?
The latest balance sheet data shows that Sisram Medical had liabilities of $94.9 million due within the year, and liabilities of $37.9 million due thereafter. On the other hand, it had liquidities of 148.7 million dollars and 71.8 million dollars of receivables at less than one year. So he actually has US$87.7 million After liquid assets than total liabilities.
This short-term liquidity is a sign that Sisram Medical could probably repay its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Sisram Medical has more cash than debt is arguably a good indication that it can safely manage its debt.
On top of that, we are happy to report that Sisram Medical has increased its EBIT by 40%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Sisram Medical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. Sisram Medical may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its capacity. . to manage debt. Over the past three years, Sisram Medical has recorded free cash flow of 69% of its EBIT, which is about normal given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
While it’s always a good idea to investigate a company’s debt, in this case Sisram Medical has $143.0 million in net cash and a decent balance sheet. And we liked the look of EBIT growth of 40% YoY last year. We therefore do not believe Sisram Medical’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To this end, you should be aware of the 1 warning sign we spotted with Sisram Medical.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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