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.' 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. Importantly, Boai NKY Medical Holdings Ltd. (SZSE:300109) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Boai NKY Medical Holdings's Net Debt?

As you can see below, Boai NKY Medical Holdings had CN¥59.6m of debt at March 2024, down from CN¥70.5m a year prior. However, its balance sheet shows it holds CN¥282.9m in cash, so it actually has CN¥223.4m net cash.

How Strong Is Boai NKY Medical Holdings' Balance Sheet?

According to the last reported balance sheet, Boai NKY Medical Holdings had liabilities of CN¥395.5m due within 12 months, and liabilities of CN¥66.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥282.9m as well as receivables valued at CN¥478.5m due within 12 months. So it can boast CN¥299.9m more liquid assets than total liabilities.

This surplus suggests that Boai NKY Medical Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Boai NKY Medical Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Boai NKY Medical Holdings grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Boai NKY Medical Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Boai NKY Medical Holdings 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. Considering the last three years, Boai NKY Medical Holdings actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Boai NKY Medical Holdings has CN¥223.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 18% year-on-year EBIT growth. So we are not troubled with Boai NKY Medical Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Boai NKY Medical Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.