Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shanghai Anlogic Infotech Co., Ltd. (SHSE:688107) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

What Is Shanghai Anlogic Infotech's Debt?

As you can see below, at the end of September 2023, Shanghai Anlogic Infotech had CN¥100.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥641.1m in cash to offset that, meaning it has CN¥541.1m net cash.

A Look At Shanghai Anlogic Infotech's Liabilities

We can see from the most recent balance sheet that Shanghai Anlogic Infotech had liabilities of CN¥248.9m falling due within a year, and liabilities of CN¥43.8m due beyond that. Offsetting this, it had CN¥641.1m in cash and CN¥198.3m in receivables that were due within 12 months. So it actually has CN¥546.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Anlogic Infotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shanghai Anlogic Infotech 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 ultimately the future profitability of the business will decide if Shanghai Anlogic Infotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shanghai Anlogic Infotech had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥837m. We would much prefer see growth.

So How Risky Is Shanghai Anlogic Infotech?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Shanghai Anlogic Infotech 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¥437m and booked a CN¥140m accounting loss. However, it has net cash of CN¥541.1m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Shanghai Anlogic Infotech's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.