Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Peijia Medical Limited (HKG:9996) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Peijia Medical

What Is Peijia Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Peijia Medical had CN¥184.1m of debt, an increase on CN¥65.0m, over one year. However, it does have CN¥1.07b in cash offsetting this, leading to net cash of CN¥884.9m.

How Healthy Is Peijia Medical's Balance Sheet?

According to the last reported balance sheet, Peijia Medical had liabilities of CN¥158.6m due within 12 months, and liabilities of CN¥225.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.07b as well as receivables valued at CN¥84.9m due within 12 months. So it actually has CN¥769.7m more liquid assets than total liabilities.

This excess liquidity suggests that Peijia Medical is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Peijia Medical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Peijia Medical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Peijia Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 75%, to CN¥357m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Peijia Medical?

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 Peijia Medical had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥942m of cash and made a loss of CN¥528m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥884.9m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Peijia Medical may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 1 warning sign for Peijia Medical you should be aware of.

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.