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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SonoScape Medical Corp. (SZSE:300633) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SonoScape Medical's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 SonoScape Medical had debt of CN¥350.4m, up from CN¥104.2m in one year. But on the other hand it also has CN¥1.85b in cash, leading to a CN¥1.50b net cash position.

How Healthy Is SonoScape Medical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SonoScape Medical had liabilities of CN¥935.2m due within 12 months and liabilities of CN¥100.8m due beyond that. Offsetting this, it had CN¥1.85b in cash and CN¥183.0m in receivables that were due within 12 months. So it actually has CN¥995.5m more liquid assets than total liabilities.

This surplus suggests that SonoScape Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SonoScape Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact SonoScape Medical's saving grace is its low debt levels, because its EBIT has tanked 56% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SonoScape Medical'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, a company can only pay off debt with cold hard cash, not accounting profits. While SonoScape Medical 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. During the last three years, SonoScape Medical produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SonoScape Medical has net cash of CN¥1.50b, as well as more liquid assets than liabilities. So we are not troubled with SonoScape Medical's debt use. 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 instance, we've identified 2 warning signs for SonoScape Medical that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.