David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We note that Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) does have debt on its balance sheet. But is this debt a concern to shareholders?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shandong Weigao Group Medical Polymer
As you can see below, Shandong Weigao Group Medical Polymer had CN¥4.37b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥7.15b in cash, so it actually has CN¥2.78b net cash.
We can see from the most recent balance sheet that Shandong Weigao Group Medical Polymer had liabilities of CN¥5.91b falling due within a year, and liabilities of CN¥4.41b due beyond that. Offsetting this, it had CN¥7.15b in cash and CN¥7.06b in receivables that were due within 12 months. So it can boast CN¥3.89b more liquid assets than total liabilities.
This short term liquidity is a sign that Shandong Weigao Group Medical Polymer could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shandong Weigao Group Medical Polymer has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that Shandong Weigao Group Medical Polymer grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shandong Weigao Group Medical Polymer can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shandong Weigao Group Medical Polymer may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Shandong Weigao Group Medical Polymer recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company's debt, in this case Shandong Weigao Group Medical Polymer has CN¥2.78b in net cash and a decent-looking balance sheet. So we don't think Shandong Weigao Group Medical Polymer's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shandong Weigao Group Medical Polymer's earnings per share history for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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Shandong Weigao Group Medical Polymer Company Limited engages in the research and development, production, and sale of single-use medical devices in the People’s Republic of China.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet, good value and pays a dividend.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Shandong Weigao Group Medical Polymer Company Limited engages in the research and development, production, and sale of single-use medical devices in the People’s Republic of China.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet, good value and pays a dividend.
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