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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Contec Medical Systems Co.,Ltd (SZSE:300869) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Contec Medical SystemsLtd Carry?

The image below, which you can click on for greater detail, shows that Contec Medical SystemsLtd had debt of CN¥805.1m at the end of September 2024, a reduction from CN¥1.25b over a year. But it also has CN¥1.38b in cash to offset that, meaning it has CN¥572.1m net cash.

How Strong Is Contec Medical SystemsLtd's Balance Sheet?

According to the last reported balance sheet, Contec Medical SystemsLtd had liabilities of CN¥173.4m due within 12 months, and liabilities of CN¥725.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.38b as well as receivables valued at CN¥57.6m due within 12 months. So it can boast CN¥535.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Contec Medical SystemsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Contec Medical SystemsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Contec Medical SystemsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Contec Medical SystemsLtd had a loss before interest and tax, and actually shrunk its revenue by 47%, to CN¥464m. To be frank that doesn't bode well.

So How Risky Is Contec Medical SystemsLtd?

Although Contec Medical SystemsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥9.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Contec Medical SystemsLtd has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.