Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Innovative Medical Management Co.,Ltd. (SZSE:002173) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Innovative Medical ManagementLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Innovative Medical ManagementLtd had debt of CN¥30.0m, up from CN¥23.1m in one year. But on the other hand it also has CN¥620.9m in cash, leading to a CN¥590.9m net cash position.

A Look At Innovative Medical ManagementLtd's Liabilities

According to the last reported balance sheet, Innovative Medical ManagementLtd had liabilities of CN¥311.4m due within 12 months, and liabilities of CN¥88.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥620.9m as well as receivables valued at CN¥88.6m due within 12 months. So it actually has CN¥309.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Innovative Medical ManagementLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Innovative Medical ManagementLtd 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 you can't view debt in total isolation; since Innovative Medical ManagementLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Innovative Medical ManagementLtd reported revenue of CN¥776m, which is a gain of 8.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Innovative Medical ManagementLtd?

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 Innovative Medical ManagementLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥21m of cash and made a loss of CN¥75m. But the saving grace is the CN¥590.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Innovative Medical ManagementLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.