Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jiangsu Yahong Meditech Co., Ltd. (SHSE:688176) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangsu Yahong Meditech's Debt?

As you can see below, at the end of September 2024, Jiangsu Yahong Meditech had CN¥66.2m of debt, up from CN¥33.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.52b in cash, so it actually has CN¥1.45b net cash.

A Look At Jiangsu Yahong Meditech's Liabilities

According to the last reported balance sheet, Jiangsu Yahong Meditech had liabilities of CN¥177.9m due within 12 months, and liabilities of CN¥56.3m due beyond 12 months. Offsetting this, it had CN¥1.52b in cash and CN¥55.7m in receivables that were due within 12 months. So it can boast CN¥1.34b more liquid assets than total liabilities.

This excess liquidity is a great indication that Jiangsu Yahong Meditech's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Jiangsu Yahong Meditech has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Jiangsu Yahong Meditech'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.

Over 12 months, Jiangsu Yahong Meditech reported revenue of CN¥150m, which is a gain of 4,882%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Jiangsu Yahong Meditech?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jiangsu Yahong Meditech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥452m and booked a CN¥403m accounting loss. But the saving grace is the CN¥1.45b 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 Jiangsu Yahong Meditech has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Jiangsu Yahong Meditech that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.