Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Intco Medical Technology Co., Ltd. (SZSE:300677) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Intco Medical Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Intco Medical Technology had CN¥9.37b of debt, an increase on CN¥3.16b, over one year. But on the other hand it also has CN¥15.1b in cash, leading to a CN¥5.77b net cash position.

A Look At Intco Medical Technology's Liabilities

According to the last reported balance sheet, Intco Medical Technology had liabilities of CN¥10.8b due within 12 months, and liabilities of CN¥2.12b due beyond 12 months. On the other hand, it had cash of CN¥15.1b and CN¥1.23b worth of receivables due within a year. So it actually has CN¥3.46b more liquid assets than total liabilities.

This excess liquidity suggests that Intco Medical Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Intco Medical Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Intco Medical Technology turned things around in the last 12 months, delivering and EBIT of CN¥109m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Intco Medical Technology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Intco Medical Technology 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. During the last year, Intco Medical Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Intco Medical Technology has net cash of CN¥5.77b, as well as more liquid assets than liabilities. So we don't have any problem with Intco Medical Technology's use of debt. 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 - Intco Medical Technology has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.