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 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. As with many other companies DBAPPSecurity Co., Ltd. (SHSE:688023) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DBAPPSecurity

What Is DBAPPSecurity's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 DBAPPSecurity had debt of CN¥1.21b, up from CN¥1.08b in one year. But on the other hand it also has CN¥1.36b in cash, leading to a CN¥150.9m net cash position.

A Look At DBAPPSecurity's Liabilities

Zooming in on the latest balance sheet data, we can see that DBAPPSecurity had liabilities of CN¥1.51b due within 12 months and liabilities of CN¥585.4m due beyond that. On the other hand, it had cash of CN¥1.36b and CN¥756.6m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to DBAPPSecurity's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥8.91b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that DBAPPSecurity 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 it is future earnings, more than anything, that will determine DBAPPSecurity's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, DBAPPSecurity reported revenue of CN¥2.1b, which is a gain of 7.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is DBAPPSecurity?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months DBAPPSecurity lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥478m of cash and made a loss of CN¥332m. Given it only has net cash of CN¥150.9m, the company may need to raise more capital if it doesn't reach break-even soon. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how DBAPPSecurity's profit, revenue, and operating cashflow have changed over the last few years.

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.

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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.