The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sino Medical Sciences Technology Inc. (SHSE:688108) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sino Medical Sciences Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Sino Medical Sciences Technology had debt of CN¥206.2m, up from CN¥79.1m in one year. But it also has CN¥224.9m in cash to offset that, meaning it has CN¥18.7m net cash.

How Strong Is Sino Medical Sciences Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sino Medical Sciences Technology had liabilities of CN¥156.7m due within 12 months and liabilities of CN¥224.5m due beyond that. Offsetting this, it had CN¥224.9m in cash and CN¥21.1m in receivables that were due within 12 months. So its liabilities total CN¥135.1m more than the combination of its cash and short-term receivables.

Given Sino Medical Sciences Technology has a market capitalization of CN¥3.81b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sino Medical Sciences Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Sino Medical Sciences Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sino Medical Sciences Technology reported revenue of CN¥417m, which is a gain of 54%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sino Medical Sciences Technology?

While Sino Medical Sciences Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Sino Medical Sciences Technology is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Sino Medical Sciences Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.