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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that InventisBio Co., Limited (SHSE:688382) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.

What Is InventisBio's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 InventisBio had debt of CN¥16.3m, up from none in one year. But it also has CN¥2.01b in cash to offset that, meaning it has CN¥2.00b net cash.

How Healthy Is InventisBio's Balance Sheet?

We can see from the most recent balance sheet that InventisBio had liabilities of CN¥126.5m falling due within a year, and liabilities of CN¥8.63m due beyond that. Offsetting this, it had CN¥2.01b in cash and CN¥82.0m in receivables that were due within 12 months. So it actually has CN¥1.96b more liquid assets than total liabilities.

This excess liquidity is a great indication that InventisBio's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that InventisBio has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine InventisBio's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

While it hasn't made a profit, at least InventisBio booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is InventisBio?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year InventisBio had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥389m of cash and made a loss of CN¥340m. But the saving grace is the CN¥2.00b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for InventisBio you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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