Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Beijing Balance Medical Technology Co.,Ltd. (SHSE:688198) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Beijing Balance Medical TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Beijing Balance Medical TechnologyLtd had CN¥13.4m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥484.8m in cash, so it actually has CN¥471.4m net cash.

How Healthy Is Beijing Balance Medical TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Beijing Balance Medical TechnologyLtd had liabilities of CN¥55.4m due within 12 months, and liabilities of CN¥57.3m due beyond 12 months. Offsetting this, it had CN¥484.8m in cash and CN¥76.5m in receivables that were due within 12 months. So it can boast CN¥448.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Balance Medical TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Beijing Balance Medical TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Beijing Balance Medical TechnologyLtd has boosted its EBIT by 48%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing Balance Medical TechnologyLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Balance Medical TechnologyLtd 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. In the last three years, Beijing Balance Medical TechnologyLtd created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Beijing Balance Medical TechnologyLtd has net cash of CN¥471.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 48% year-on-year EBIT growth. So is Beijing Balance Medical TechnologyLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Beijing Balance Medical TechnologyLtd, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.