David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that ArcherMind Technology (Nanjing) Co., Ltd. (SZSE:300598) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is ArcherMind Technology (Nanjing)'s Net Debt?

As you can see below, ArcherMind Technology (Nanjing) had CN¥320.6m of debt at March 2024, down from CN¥393.9m a year prior. However, its balance sheet shows it holds CN¥757.4m in cash, so it actually has CN¥436.8m net cash.

How Healthy Is ArcherMind Technology (Nanjing)'s Balance Sheet?

We can see from the most recent balance sheet that ArcherMind Technology (Nanjing) had liabilities of CN¥637.9m falling due within a year, and liabilities of CN¥5.40m due beyond that. On the other hand, it had cash of CN¥757.4m and CN¥623.3m worth of receivables due within a year. So it can boast CN¥737.4m more liquid assets than total liabilities.

This surplus suggests that ArcherMind Technology (Nanjing) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ArcherMind Technology (Nanjing) 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 ArcherMind Technology (Nanjing)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, ArcherMind Technology (Nanjing) 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 ArcherMind Technology (Nanjing)?

Although ArcherMind Technology (Nanjing) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥208m. 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. 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. We've identified 2 warning signs with ArcherMind Technology (Nanjing) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com