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 CloudWalk Technology Co., Ltd. (SHSE:688327) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is CloudWalk Technology's Debt?

The image below, which you can click on for greater detail, shows that CloudWalk Technology had debt of CN¥606.3m at the end of March 2024, a reduction from CN¥973.8m over a year. However, its balance sheet shows it holds CN¥1.31b in cash, so it actually has CN¥701.7m net cash.

How Strong Is CloudWalk Technology's Balance Sheet?

We can see from the most recent balance sheet that CloudWalk Technology had liabilities of CN¥1.07b falling due within a year, and liabilities of CN¥246.3m due beyond that. Offsetting this, it had CN¥1.31b in cash and CN¥679.9m in receivables that were due within 12 months. So it actually has CN¥672.1m more liquid assets than total liabilities.

This surplus suggests that CloudWalk Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CloudWalk Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CloudWalk Technology'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, CloudWalk Technology reported revenue of CN¥637m, which is a gain of 78%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is CloudWalk Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CloudWalk Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥476m and booked a CN¥660m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥701.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, CloudWalk Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CloudWalk Technology's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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