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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Inmyshow Digital Technology(Group)Co.,Ltd. (SHSE:600556) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Inmyshow Digital Technology(Group)Co.Ltd's Debt?

As you can see below, Inmyshow Digital Technology(Group)Co.Ltd had CN¥493.0m of debt at September 2024, down from CN¥879.0m a year prior. But on the other hand it also has CN¥1.60b in cash, leading to a CN¥1.10b net cash position.

How Healthy Is Inmyshow Digital Technology(Group)Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inmyshow Digital Technology(Group)Co.Ltd had liabilities of CN¥1.61b due within 12 months and liabilities of CN¥42.9m due beyond that. On the other hand, it had cash of CN¥1.60b and CN¥2.62b worth of receivables due within a year. So it actually has CN¥2.56b more liquid assets than total liabilities.

This excess liquidity suggests that Inmyshow Digital Technology(Group)Co.Ltd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Inmyshow Digital Technology(Group)Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Inmyshow Digital Technology(Group)Co.Ltd's load is not too heavy, because its EBIT was down 73% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Inmyshow Digital Technology(Group)Co.Ltd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Inmyshow Digital Technology(Group)Co.Ltd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Inmyshow Digital Technology(Group)Co.Ltd created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Inmyshow Digital Technology(Group)Co.Ltd has net cash of CN¥1.10b, as well as more liquid assets than liabilities. So we are not troubled with Inmyshow Digital Technology(Group)Co.Ltd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Inmyshow Digital Technology(Group)Co.Ltd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.