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. We note that Shanghai Medicilon Inc. (SHSE:688202) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shanghai Medicilon's Net Debt?

As you can see below, at the end of March 2024, Shanghai Medicilon had CN¥309.1m of debt, up from CN¥289.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥813.3m in cash, leading to a CN¥504.2m net cash position.

How Healthy Is Shanghai Medicilon's Balance Sheet?

The latest balance sheet data shows that Shanghai Medicilon had liabilities of CN¥594.3m due within a year, and liabilities of CN¥62.1m falling due after that. On the other hand, it had cash of CN¥813.3m and CN¥696.2m worth of receivables due within a year. So it can boast CN¥853.0m more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Medicilon is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shanghai Medicilon has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai Medicilon 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, Shanghai Medicilon made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is Shanghai Medicilon?

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 Shanghai Medicilon had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥169m and booked a CN¥172m accounting loss. Given it only has net cash of CN¥504.2m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Shanghai Medicilon is showing 2 warning signs in our investment analysis , you should know about...

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.

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