Yahoo Finance Sisram Medical (HKG:1696) Could Easily Take On More Debt
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sisram Medical Ltd (HKG:1696) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Sisram Medical
What Is Sisram Medical's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Sisram Medical had US$2.96m of debt in June 2019, down from US$9.13m, one year before. However, its balance sheet shows it holds US$102.8m in cash, so it actually has US$99.8m net cash.
A Look At Sisram Medical's Liabilities
We can see from the most recent balance sheet that Sisram Medical had liabilities of US$41.4m falling due within a year, and liabilities of US$25.5m due beyond that. Offsetting these obligations, it had cash of US$102.8m as well as receivables valued at US$56.8m due within 12 months. So it can boast US$92.6m more liquid assets than total liabilities.
This surplus strongly suggests that Sisram Medical has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sisram Medical boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Sisram Medical grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sisram Medical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Sisram Medical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Sisram Medical produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Sisram Medical has net cash of US$99.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't think Sisram Medical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Sisram Medical that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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