Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Shanghai Labway Clinical Laboratory Co., Ltd (SZSE:301060) does carry debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Shanghai Labway Clinical Laboratory Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shanghai Labway Clinical Laboratory had CN¥347.5m of debt, an increase on CN¥159.3m, over one year. But on the other hand it also has CN¥789.8m in cash, leading to a CN¥442.3m net cash position.

How Strong Is Shanghai Labway Clinical Laboratory's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Labway Clinical Laboratory had liabilities of CN¥739.7m falling due within a year, and liabilities of CN¥177.4m due beyond that. Offsetting this, it had CN¥789.8m in cash and CN¥1.06b in receivables that were due within 12 months. So it can boast CN¥935.0m more liquid assets than total liabilities.

It's good to see that Shanghai Labway Clinical Laboratory has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shanghai Labway Clinical Laboratory 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 Shanghai Labway Clinical Laboratory's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shanghai Labway Clinical Laboratory had a loss before interest and tax, and actually shrunk its revenue by 55%, to CN¥1.7b. That makes us nervous, to say the least.

So How Risky Is Shanghai Labway Clinical Laboratory?

Although Shanghai Labway Clinical Laboratory had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥44m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 2 warning signs for Shanghai Labway Clinical Laboratory (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.