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.' 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. We can see that Everest Medicines Limited (HKG:1952) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Everest Medicines's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Everest Medicines had debt of CN¥480.6m, up from CN¥455.0m in one year. But it also has CN¥2.35b in cash to offset that, meaning it has CN¥1.87b net cash.

A Look At Everest Medicines' Liabilities

We can see from the most recent balance sheet that Everest Medicines had liabilities of CN¥300.1m falling due within a year, and liabilities of CN¥504.0m due beyond that. Offsetting this, it had CN¥2.35b in cash and CN¥131.8m in receivables that were due within 12 months. So it actually has CN¥1.68b more liquid assets than total liabilities.

This surplus suggests that Everest Medicines is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Everest Medicines 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 Everest Medicines 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.

In the last year Everest Medicines wasn't profitable at an EBIT level, but managed to grow its revenue by 884%, to CN¥126m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Everest Medicines?

While Everest Medicines lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥545m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 884% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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. For example - Everest Medicines has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.