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. Importantly, Kingsignal Technology Co., Ltd. (SZSE:300252) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kingsignal Technology

What Is Kingsignal Technology's Net Debt?

As you can see below, Kingsignal Technology had CN¥1.47b of debt at September 2023, down from CN¥1.76b a year prior. On the flip side, it has CN¥1.04b in cash leading to net debt of about CN¥433.4m.

How Strong Is Kingsignal Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kingsignal Technology had liabilities of CN¥2.90b due within 12 months and liabilities of CN¥156.3m due beyond that. On the other hand, it had cash of CN¥1.04b and CN¥1.62b worth of receivables due within a year. So its liabilities total CN¥388.6m more than the combination of its cash and short-term receivables.

Given Kingsignal Technology has a market capitalization of CN¥6.39b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kingsignal 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.

In the last year Kingsignal Technology had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥1.9b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Kingsignal Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥328m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥106m of cash over the last year. So to be blunt we think it is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Kingsignal Technology (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.