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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Double Medical Technology Inc. (SZSE:002901) does carry debt. But should shareholders be worried about its use of debt?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Double Medical Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Double Medical Technology had debt of CN¥465.3m, up from CN¥50.1m in one year. But it also has CN¥1.55b in cash to offset that, meaning it has CN¥1.08b net cash.

How Healthy Is Double Medical Technology's Balance Sheet?

We can see from the most recent balance sheet that Double Medical Technology had liabilities of CN¥1.03b falling due within a year, and liabilities of CN¥265.0m due beyond that. On the other hand, it had cash of CN¥1.55b and CN¥306.8m worth of receivables due within a year. So it actually has CN¥561.3m more liquid assets than total liabilities.

This surplus suggests that Double Medical Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Double Medical Technology 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 it is future earnings, more than anything, that will determine Double Medical Technology'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.

In the last year Double Medical Technology had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥1.3b. That makes us nervous, to say the least.

So How Risky Is Double Medical 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 Double Medical Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥198m of cash and made a loss of CN¥23m. With only CN¥1.08b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. For riskier companies like Double Medical Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.