Warren Buffett famously said, '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. As with many other companies QuakeSafe Technologies Co., Ltd. (SZSE:300767) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for QuakeSafe Technologies

What Is QuakeSafe Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 QuakeSafe Technologies had debt of CN¥492.9m, up from CN¥427.6m in one year. However, it does have CN¥511.6m in cash offsetting this, leading to net cash of CN¥18.7m.

How Healthy Is QuakeSafe Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that QuakeSafe Technologies had liabilities of CN¥560.3m due within 12 months and liabilities of CN¥363.0m due beyond that. On the other hand, it had cash of CN¥511.6m and CN¥903.9m worth of receivables due within a year. So it can boast CN¥492.2m more liquid assets than total liabilities.

This surplus suggests that QuakeSafe Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, QuakeSafe Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that QuakeSafe Technologies has increased its EBIT by 7.2% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine QuakeSafe Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. QuakeSafe Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, QuakeSafe Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case QuakeSafe Technologies has CN¥18.7m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 7.2% over the last year. So we are not troubled with QuakeSafe Technologies's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in QuakeSafe Technologies, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.