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 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. Importantly, Empyrean Technology Co., Ltd. (SZSE:301269) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Empyrean Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Empyrean Technology had CN¥122.6m of debt, an increase on CN¥66.0m, over one year. But on the other hand it also has CN¥3.10b in cash, leading to a CN¥2.98b net cash position.

How Strong Is Empyrean Technology's Balance Sheet?

We can see from the most recent balance sheet that Empyrean Technology had liabilities of CN¥491.6m falling due within a year, and liabilities of CN¥260.6m due beyond that. Offsetting this, it had CN¥3.10b in cash and CN¥326.0m in receivables that were due within 12 months. So it can boast CN¥2.68b more liquid assets than total liabilities.

This surplus suggests that Empyrean Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Empyrean Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Empyrean Technology grew its EBIT by 640% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Empyrean Technology 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Empyrean Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Empyrean Technology's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Empyrean Technology has CN¥2.98b in net cash and a decent-looking balance sheet. And we liked the look of last year's 640% year-on-year EBIT growth. So is Empyrean Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Empyrean Technology's earnings per share history for free.

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.