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 Peijia Medical Limited (HKG:9996) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Peijia Medical

What Is Peijia Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Peijia Medical had CN¥65.0m of debt, an increase on none, over one year. However, it does have CN¥1.89b in cash offsetting this, leading to net cash of CN¥1.82b.

A Look At Peijia Medical's Liabilities

The latest balance sheet data shows that Peijia Medical had liabilities of CN¥170.6m due within a year, and liabilities of CN¥39.4m falling due after that. Offsetting this, it had CN¥1.89b in cash and CN¥63.4m in receivables that were due within 12 months. So it actually has CN¥1.74b more liquid assets than total liabilities.

This surplus strongly suggests that Peijia Medical has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Peijia Medical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Peijia Medical 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.

In the last year Peijia Medical wasn't profitable at an EBIT level, but managed to grow its revenue by 168%, to CN¥204m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Peijia Medical?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Peijia Medical had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥790m and booked a CN¥491m accounting loss. But the saving grace is the CN¥1.82b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Peijia Medical has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 example, we've discovered 1 warning sign for Peijia Medical that you should be aware of before investing here.

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.