The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Zhe Jiang Dali Technology Co.,Ltd (SZSE:002214) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhe Jiang Dali TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhe Jiang Dali TechnologyLtd had debt of CN¥324.0m, up from CN¥129.0m in one year. However, because it has a cash reserve of CN¥265.5m, its net debt is less, at about CN¥58.5m.

A Look At Zhe Jiang Dali TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhe Jiang Dali TechnologyLtd had liabilities of CN¥318.2m due within 12 months and liabilities of CN¥249.7m due beyond that. Offsetting these obligations, it had cash of CN¥265.5m as well as receivables valued at CN¥765.8m due within 12 months. So it actually has CN¥463.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhe Jiang Dali TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Zhe Jiang Dali TechnologyLtd has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhe Jiang Dali TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhe Jiang Dali TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥244m. That's not what we would hope to see.

Caveat Emptor

Not only did Zhe Jiang Dali TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥245m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. For example - Zhe Jiang Dali TechnologyLtd has 1 warning sign we think you should be aware of.

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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