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. We note that Innuovo Technology Co., Ltd. (SZSE:000795) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Innuovo Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Innuovo Technology had CN¥295.0m of debt in September 2024, down from CN¥1.28b, one year before. But it also has CN¥813.7m in cash to offset that, meaning it has CN¥518.6m net cash.

How Healthy Is Innuovo Technology's Balance Sheet?

We can see from the most recent balance sheet that Innuovo Technology had liabilities of CN¥1.12b falling due within a year, and liabilities of CN¥81.5m due beyond that. On the other hand, it had cash of CN¥813.7m and CN¥1.05b worth of receivables due within a year. So it can boast CN¥663.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Innuovo Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Innuovo Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Innuovo Technology grew its EBIT by 116% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Innuovo Technology will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Innuovo Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Innuovo Technology generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Innuovo Technology has CN¥518.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥442m. So is Innuovo Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Innuovo Technology you should know about.

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.