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.' 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. We can see that InnoCare Pharma Limited (HKG:9969) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does InnoCare Pharma Carry?

The image below, which you can click on for greater detail, shows that at September 2023 InnoCare Pharma had debt of CN¥328.2m, up from CN¥283.4m in one year. However, its balance sheet shows it holds CN¥8.26b in cash, so it actually has CN¥7.93b net cash.

A Look At InnoCare Pharma's Liabilities

Zooming in on the latest balance sheet data, we can see that InnoCare Pharma had liabilities of CN¥2.02b due within 12 months and liabilities of CN¥636.4m due beyond that. On the other hand, it had cash of CN¥8.26b and CN¥190.9m worth of receivables due within a year. So it can boast CN¥5.79b more liquid assets than total liabilities.

This surplus liquidity suggests that InnoCare Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that InnoCare Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if InnoCare Pharma 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.

Over 12 months, InnoCare Pharma reported revenue of CN¥721m, which is a gain of 43%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is InnoCare Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year InnoCare Pharma had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥834m of cash and made a loss of CN¥584m. But the saving grace is the CN¥7.93b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, InnoCare Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 1 warning sign for InnoCare Pharma that you should be aware of before investing here.

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.