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. We can see that Jenscare Scientific Co., Ltd. (HKG:9877) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Jenscare Scientific Carry?

As you can see below, at the end of December 2023, Jenscare Scientific had CN¥40.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.09b in cash, so it actually has CN¥1.05b net cash.

A Look At Jenscare Scientific's Liabilities

According to the last reported balance sheet, Jenscare Scientific had liabilities of CN¥58.7m due within 12 months, and liabilities of CN¥42.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.09b as well as receivables valued at CN¥681.0k due within 12 months. So it actually has CN¥994.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Jenscare Scientific's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Jenscare Scientific has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jenscare Scientific 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.

Since Jenscare Scientific doesn't have significant operating revenue, shareholders must hope it'll ramp sales of its new medical tech as soon as possible.

So How Risky Is Jenscare Scientific?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jenscare Scientific had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥246m of cash and made a loss of CN¥372m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.05b. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jenscare Scientific has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.