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 InnoCare Pharma Limited (HKG:9969) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is InnoCare Pharma's Debt?

As you can see below, at the end of March 2024, InnoCare Pharma had CN¥343.3m of debt, up from CN¥292.0m a year ago. Click the image for more detail. However, it does have CN¥8.20b in cash offsetting this, leading to net cash of CN¥7.86b.

How Strong Is InnoCare Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InnoCare Pharma had liabilities of CN¥2.06b due within 12 months and liabilities of CN¥656.9m due beyond that. Offsetting this, it had CN¥8.20b in cash and CN¥234.8m in receivables that were due within 12 months. So it actually has CN¥5.72b more liquid assets than total liabilities.

This surplus liquidity suggests that InnoCare Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, InnoCare Pharma 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 InnoCare Pharma 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.

Over 12 months, InnoCare Pharma reported revenue of CN¥715m, which is a gain of 2.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is InnoCare Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that InnoCare Pharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥832m of cash and made a loss of CN¥761m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥7.86b. That means it could keep spending at its current rate for more than two years. 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. 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. Be aware that InnoCare Pharma is showing 2 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com