Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Intco Medical Technology Co., Ltd. (SZSE:300677) makes use of debt. But should shareholders be worried about its use of debt?

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.

What Is Intco Medical Technology's Debt?

As you can see below, at the end of September 2024, Intco Medical Technology had CN¥13.3b of debt, up from CN¥5.31b a year ago. Click the image for more detail. But it also has CN¥18.4b in cash to offset that, meaning it has CN¥5.11b net cash.

How Strong Is Intco Medical Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Intco Medical Technology had liabilities of CN¥14.7b due within 12 months and liabilities of CN¥2.17b due beyond that. Offsetting this, it had CN¥18.4b in cash and CN¥1.53b in receivables that were due within 12 months. So it can boast CN¥3.09b more liquid assets than total liabilities.

This excess liquidity suggests that Intco Medical Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Intco Medical Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Intco Medical Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥614m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Intco Medical Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Intco Medical Technology 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 year, Intco Medical Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Intco Medical Technology has net cash of CN¥5.11b, as well as more liquid assets than liabilities. So we are not troubled with Intco Medical Technology's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Intco Medical Technology that you should be aware of.

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.