The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, 3D Medicines Inc. (HKG:1244) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 3D Medicines Carry?

The image below, which you can click on for greater detail, shows that at June 2024 3D Medicines had debt of CN¥229.7m, up from CN¥206.4m in one year. However, its balance sheet shows it holds CN¥652.8m in cash, so it actually has CN¥423.1m net cash.

A Look At 3D Medicines' Liabilities

Zooming in on the latest balance sheet data, we can see that 3D Medicines had liabilities of CN¥401.9m due within 12 months and liabilities of CN¥88.8m due beyond that. On the other hand, it had cash of CN¥652.8m and CN¥297.2m worth of receivables due within a year. So it actually has CN¥459.3m more liquid assets than total liabilities.

This surplus liquidity suggests that 3D Medicines' 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. Succinctly put, 3D Medicines boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is 3D Medicines'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, 3D Medicines made a loss at the EBIT level, and saw its revenue drop to CN¥489m, which is a fall of 31%. That makes us nervous, to say the least.

So How Risky Is 3D Medicines?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that 3D Medicines had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥203m of cash and made a loss of CN¥450m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥423.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with 3D Medicines (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.