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.' 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 Innovative Medical Management Co.,Ltd. (SZSE:002173) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Innovative Medical ManagementLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Innovative Medical ManagementLtd had debt of CN¥49.1m, up from CN¥30.0m in one year. However, its balance sheet shows it holds CN¥560.4m in cash, so it actually has CN¥511.4m net cash.

How Healthy Is Innovative Medical ManagementLtd's Balance Sheet?

We can see from the most recent balance sheet that Innovative Medical ManagementLtd had liabilities of CN¥306.5m falling due within a year, and liabilities of CN¥70.1m due beyond that. Offsetting this, it had CN¥560.4m in cash and CN¥113.6m in receivables that were due within 12 months. So it can boast CN¥297.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Innovative Medical ManagementLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Innovative Medical ManagementLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Innovative Medical ManagementLtd 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.

Over 12 months, Innovative Medical ManagementLtd reported revenue of CN¥809m, which is a gain of 4.2%, 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 Innovative Medical ManagementLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Innovative Medical ManagementLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥88m of cash and made a loss of CN¥48m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥511.4m. 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. For riskier companies like Innovative Medical ManagementLtd 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.