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. Importantly, China Isotope & Radiation Corporation (HKG:1763) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does China Isotope & Radiation Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 China Isotope & Radiation had CN¥2.01b of debt, an increase on CN¥946.7m, over one year. However, it does have CN¥3.01b in cash offsetting this, leading to net cash of CN¥997.6m.

A Look At China Isotope & Radiation's Liabilities

According to the last reported balance sheet, China Isotope & Radiation had liabilities of CN¥4.41b due within 12 months, and liabilities of CN¥2.00b due beyond 12 months. Offsetting this, it had CN¥3.01b in cash and CN¥4.02b in receivables that were due within 12 months. So it can boast CN¥610.1m more liquid assets than total liabilities.

This surplus suggests that China Isotope & Radiation is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China Isotope & Radiation boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, China Isotope & Radiation saw its EBIT drop by 8.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Isotope & Radiation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Isotope & Radiation 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 three years, China Isotope & Radiation burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Isotope & Radiation has net cash of CN¥997.6m, as well as more liquid assets than liabilities. So we don't have any problem with China Isotope & Radiation's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for China Isotope & Radiation you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.