Does Innovative Medical ManagementLtd (SZSE:002173) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Innovative Medical Management Co.,Ltd. (SZSE:002173) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Innovative Medical ManagementLtd

What Is Innovative Medical ManagementLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Innovative Medical ManagementLtd had CN¥49.1m of debt, an increase on CN¥30.0m, over one year. But on the other hand it also has CN¥560.4m in cash, leading to a CN¥511.4m net cash position.

The end of cancer? These 15 emerging AI stocks are developing tech that will allow early identification of life changing diseases like cancer and Alzheimer's.

How Healthy Is Innovative Medical ManagementLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Innovative Medical ManagementLtd had liabilities of CN¥306.5m due within 12 months and liabilities of CN¥70.1m due beyond that. Offsetting these obligations, it had cash of CN¥560.4m as well as receivables valued at CN¥113.6m due within 12 months. So it actually has CN¥297.4m more liquid assets than total liabilities.

This surplus suggests that Innovative Medical ManagementLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Innovative Medical ManagementLtd 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 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.

In the last year Innovative Medical ManagementLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to CN¥809m. 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. And over the same period it saw negative free cash outflow of CN¥88m and booked a CN¥48m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥511.4m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Innovative Medical ManagementLtd 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.

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.