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.' 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 Guangzhou Kingmed Diagnostics Group Co., Ltd. (SHSE:603882) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Guangzhou Kingmed Diagnostics Group Carry?

The chart below, which you can click on for greater detail, shows that Guangzhou Kingmed Diagnostics Group had CN¥368.1m in debt in September 2023; about the same as the year before. But it also has CN¥2.06b in cash to offset that, meaning it has CN¥1.69b net cash.

How Strong Is Guangzhou Kingmed Diagnostics Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangzhou Kingmed Diagnostics Group had liabilities of CN¥2.95b due within 12 months and liabilities of CN¥539.7m due beyond that. Offsetting these obligations, it had cash of CN¥2.06b as well as receivables valued at CN¥6.19b due within 12 months. So it actually has CN¥4.76b more liquid assets than total liabilities.

It's good to see that Guangzhou Kingmed Diagnostics Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Guangzhou Kingmed Diagnostics Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Guangzhou Kingmed Diagnostics Group's saving grace is its low debt levels, because its EBIT has tanked 83% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Guangzhou Kingmed Diagnostics Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangzhou Kingmed Diagnostics Group 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. Looking at the most recent three years, Guangzhou Kingmed Diagnostics Group recorded free cash flow of 38% 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 Guangzhou Kingmed Diagnostics Group has CN¥1.69b in net cash and a decent-looking balance sheet. So we don't have any problem with Guangzhou Kingmed Diagnostics Group's use of debt. 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. Case in point: We've spotted 2 warning signs for Guangzhou Kingmed Diagnostics Group you should be aware of, and 1 of them is potentially serious.

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.