Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sino Medical Sciences Technology Inc. (SHSE:688108) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Sino Medical Sciences Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Sino Medical Sciences Technology had debt of CN¥79.1m, up from CN¥35.0m in one year. But on the other hand it also has CN¥197.9m in cash, leading to a CN¥118.8m net cash position.

How Healthy Is Sino Medical Sciences Technology's Balance Sheet?

We can see from the most recent balance sheet that Sino Medical Sciences Technology had liabilities of CN¥146.5m falling due within a year, and liabilities of CN¥98.9m due beyond that. Offsetting this, it had CN¥197.9m in cash and CN¥32.6m in receivables that were due within 12 months. So its liabilities total CN¥14.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Sino Medical Sciences Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.88b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Sino Medical Sciences Technology 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 you can't view debt in total isolation; since Sino Medical Sciences Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sino Medical Sciences Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥272m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sino Medical Sciences Technology?

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 Sino Medical Sciences Technology 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¥88m and booked a CN¥95m accounting loss. However, it has net cash of CN¥118.8m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. We've identified 2 warning signs with Sino Medical Sciences Technology , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.