Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Jinhai Medical Technology Limited (HKG:2225) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Jinhai Medical Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jinhai Medical Technology had S$7.47m of debt, an increase on S$1.87m, over one year. However, it does have S$17.7m in cash offsetting this, leading to net cash of S$10.2m.

How Healthy Is Jinhai Medical Technology's Balance Sheet?

According to the last reported balance sheet, Jinhai Medical Technology had liabilities of S$24.1m due within 12 months, and liabilities of S$3.05m due beyond 12 months. Offsetting these obligations, it had cash of S$17.7m as well as receivables valued at S$16.7m due within 12 months. So it can boast S$7.27m more liquid assets than total liabilities.

This state of affairs indicates that Jinhai Medical Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the S$1.50b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jinhai Medical Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Jinhai Medical Technology'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.

In the last year Jinhai Medical Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 205%, to S$60m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Jinhai Medical Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Jinhai Medical Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of S$1.6m and booked a S$10m accounting loss. With only S$10.2m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Jinhai Medical Technology has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example, we've discovered 1 warning sign for Jinhai Medical Technology that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.