Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Shenzhen Fastprint Circuit Tech Co.,Ltd. (SZSE:002436) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Fastprint Circuit TechLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Fastprint Circuit TechLtd had debt of CN¥4.04b, up from CN¥3.09b in one year. On the flip side, it has CN¥2.49b in cash leading to net debt of about CN¥1.55b.

How Strong Is Shenzhen Fastprint Circuit TechLtd's Balance Sheet?

According to the last reported balance sheet, Shenzhen Fastprint Circuit TechLtd had liabilities of CN¥3.47b due within 12 months, and liabilities of CN¥3.15b due beyond 12 months. Offsetting this, it had CN¥2.49b in cash and CN¥2.37b in receivables that were due within 12 months. So its liabilities total CN¥1.76b more than the combination of its cash and short-term receivables.

Given Shenzhen Fastprint Circuit TechLtd has a market capitalization of CN¥21.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Fastprint Circuit TechLtd 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 Shenzhen Fastprint Circuit TechLtd had a loss before interest and tax, and actually shrunk its revenue by 5.2%, to CN¥5.2b. That's not what we would hope to see.

Caveat Emptor

Importantly, Shenzhen Fastprint Circuit TechLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥35m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.7b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Shenzhen Fastprint Circuit TechLtd (of which 1 is a bit unpleasant!) 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.

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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.