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 note that Henan Shijia Photons Technology Co., Ltd. (SHSE:688313) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Henan Shijia Photons Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Henan Shijia Photons Technology had CN¥11.8m of debt, an increase on none, over one year. But on the other hand it also has CN¥428.9m in cash, leading to a CN¥417.0m net cash position.

How Strong Is Henan Shijia Photons Technology's Balance Sheet?

The latest balance sheet data shows that Henan Shijia Photons Technology had liabilities of CN¥210.2m due within a year, and liabilities of CN¥111.4m falling due after that. Offsetting these obligations, it had cash of CN¥428.9m as well as receivables valued at CN¥340.9m due within 12 months. So it can boast CN¥448.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Henan Shijia Photons Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Henan Shijia Photons Technology 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 Henan Shijia Photons Technology'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, Henan Shijia Photons Technology made a loss at the EBIT level, and saw its revenue drop to CN¥755m, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is Henan Shijia Photons Technology?

Although Henan Shijia Photons Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥48m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Henan Shijia Photons Technology you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.