David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Inner Mongolia OJing Science & Technology Co., Ltd. (SZSE:001269) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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 Inner Mongolia OJing Science & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Inner Mongolia OJing Science & Technology had CN¥676.1m of debt, an increase on CN¥96.7m, over one year. But on the other hand it also has CN¥763.6m in cash, leading to a CN¥87.5m net cash position.

How Strong Is Inner Mongolia OJing Science & Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Inner Mongolia OJing Science & Technology had liabilities of CN¥1.19b due within 12 months and liabilities of CN¥487.7m due beyond that. Offsetting this, it had CN¥763.6m in cash and CN¥1.15b in receivables that were due within 12 months. So it can boast CN¥229.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Inner Mongolia OJing Science & Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Inner Mongolia OJing Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Inner Mongolia OJing Science & Technology grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Inner Mongolia OJing Science & 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Inner Mongolia OJing Science & Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Inner Mongolia OJing Science & Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Inner Mongolia OJing Science & Technology has CN¥87.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 40% over the last year. So we don't have any problem with Inner Mongolia OJing Science & Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Inner Mongolia OJing Science & Technology (including 1 which is a bit concerning) .

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.