Inno Laser Technology (SZSE:301021) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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 note that Inno Laser Technology Co., Ltd. (SZSE:301021) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Inno Laser Technology

What Is Inno Laser Technology's Net Debt?

As you can see below, at the end of June 2024, Inno Laser Technology had CN¥13.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥315.5m in cash offsetting this, leading to net cash of CN¥302.5m.

How Strong Is Inno Laser Technology's Balance Sheet?

The latest balance sheet data shows that Inno Laser Technology had liabilities of CN¥219.3m due within a year, and liabilities of CN¥25.7m falling due after that. Offsetting these obligations, it had cash of CN¥315.5m as well as receivables valued at CN¥249.7m due within 12 months. So it can boast CN¥320.2m 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. Succinctly put, Inno Laser Technology 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 Inno Laser Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Inno Laser Technology reported revenue of CN¥427m, which is a gain of 51%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Inno Laser Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥126m and booked a CN¥6.0m accounting loss. But at least it has CN¥302.5m on the balance sheet to spend on growth, near-term. Inno Laser Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Inno Laser Technology , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.