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.' 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. Importantly, Intco Medical Technology Co., Ltd. (SZSE:300677) does carry debt. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Intco Medical Technology

What Is Intco Medical Technology's Net Debt?

As you can see below, at the end of March 2022, Intco Medical Technology had CN¥598.1m of debt, up from CN¥290.8m a year ago. Click the image for more detail. But it also has CN¥8.09b in cash to offset that, meaning it has CN¥7.49b net cash.

How Healthy Is Intco Medical Technology's Balance Sheet?

The latest balance sheet data shows that Intco Medical Technology had liabilities of CN¥1.88b due within a year, and liabilities of CN¥2.47b falling due after that. Offsetting these obligations, it had cash of CN¥8.09b as well as receivables valued at CN¥715.0m due within 12 months. So it can boast CN¥4.45b 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. Succinctly put, Intco Medical Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Intco Medical Technology's load is not too heavy, because its EBIT was down 66% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Intco Medical Technology's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Intco Medical 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. Looking at the most recent three years, Intco Medical Technology recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Intco Medical Technology has CN¥7.49b in net cash and a decent-looking balance sheet. So we are not troubled with Intco Medical Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Intco Medical Technology (1 shouldn't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.