Inno Laser Technology (SZSE:301021) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Inno Laser Technology Co., Ltd. (SZSE:301021) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Inno Laser Technology

How Much Debt Does Inno Laser Technology Carry?

As you can see below, at the end of September 2024, Inno Laser Technology had CN¥13.0m of debt, up from CN¥3.00m a year ago. Click the image for more detail. But on the other hand it also has CN¥321.8m in cash, leading to a CN¥308.8m net cash position.

A Look At Inno Laser Technology's Liabilities

According to the last reported balance sheet, Inno Laser Technology had liabilities of CN¥200.3m due within 12 months, and liabilities of CN¥23.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥321.8m as well as receivables valued at CN¥224.2m due within 12 months. So it actually has CN¥321.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Inno Laser Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Inno Laser Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Inno Laser Technology 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, Inno Laser Technology reported revenue of CN¥435m, which is a gain of 44%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Inno Laser Technology?

While Inno Laser Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥2.6m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 44% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. We've identified 3 warning signs with Inno Laser Technology (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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.