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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Blue Sail Medical Co.,Ltd. (SZSE:002382) makes use of 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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Blue Sail MedicalLtd

What Is Blue Sail MedicalLtd's Debt?

As you can see below, at the end of September 2023, Blue Sail MedicalLtd had CN¥3.47b of debt, up from CN¥3.07b a year ago. Click the image for more detail. On the flip side, it has CN¥1.49b in cash leading to net debt of about CN¥1.98b.

A Look At Blue Sail MedicalLtd's Liabilities

The latest balance sheet data shows that Blue Sail MedicalLtd had liabilities of CN¥3.05b due within a year, and liabilities of CN¥2.36b falling due after that. Offsetting these obligations, it had cash of CN¥1.49b as well as receivables valued at CN¥1.00b due within 12 months. So it has liabilities totalling CN¥2.92b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Blue Sail MedicalLtd is worth CN¥6.13b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Blue Sail MedicalLtd'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.

Over 12 months, Blue Sail MedicalLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.7b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Blue Sail MedicalLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥661m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥658m of cash over the last year. So suffice it to say we consider the stock very risky. 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 2 warning signs for Blue Sail MedicalLtd 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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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.