Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, YD Electronic Technology Co.,Ltd. (SZSE:301123) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is YD Electronic TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that YD Electronic TechnologyLtd had debt of CN¥11.5m at the end of March 2024, a reduction from CN¥24.2m over a year. But on the other hand it also has CN¥1.04b in cash, leading to a CN¥1.03b net cash position.

How Strong Is YD Electronic TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, YD Electronic TechnologyLtd had liabilities of CN¥839.6m due within 12 months, and liabilities of CN¥64.7m due beyond 12 months. Offsetting this, it had CN¥1.04b in cash and CN¥878.4m in receivables that were due within 12 months. So it can boast CN¥1.02b more liquid assets than total liabilities.

This surplus suggests that YD Electronic TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that YD Electronic TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is YD Electronic TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, YD Electronic TechnologyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is YD Electronic TechnologyLtd?

Although YD Electronic TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥939k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for YD Electronic TechnologyLtd (3 can't be ignored) you should be aware of.

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.