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. As with many other companies Jiangsu Yuyue Medical Equipment & Supply Co., Ltd. (SZSE:002223) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Yuyue Medical Equipment & Supply's Net Debt?

The image below, which you can click on for greater detail, shows that Jiangsu Yuyue Medical Equipment & Supply had debt of CN¥1.00b at the end of March 2024, a reduction from CN¥1.49b over a year. But it also has CN¥7.66b in cash to offset that, meaning it has CN¥6.65b net cash.

How Strong Is Jiangsu Yuyue Medical Equipment & Supply's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Yuyue Medical Equipment & Supply had liabilities of CN¥3.05b falling due within a year, and liabilities of CN¥965.2m due beyond that. Offsetting these obligations, it had cash of CN¥7.66b as well as receivables valued at CN¥1.07b due within 12 months. So it actually has CN¥4.71b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Yuyue Medical Equipment & Supply has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Yuyue Medical Equipment & Supply boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jiangsu Yuyue Medical Equipment & Supply grew its EBIT at 11% 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 Jiangsu Yuyue Medical Equipment & Supply 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Yuyue Medical Equipment & Supply 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 last three years, Jiangsu Yuyue Medical Equipment & Supply actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Yuyue Medical Equipment & Supply has CN¥6.65b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CN¥1.9b. So is Jiangsu Yuyue Medical Equipment & Supply's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Jiangsu Yuyue Medical Equipment & Supply , and understanding them should be part of your investment process.

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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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.