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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 HuiZhou Intelligence Technology Group's Net Debt?

As you can see below, HuiZhou Intelligence Technology Group had CN¥53.0m of debt at March 2024, down from CN¥127.6m a year prior. But on the other hand it also has CN¥567.9m in cash, leading to a CN¥514.9m net cash position.

A Look At HuiZhou Intelligence Technology Group's Liabilities

We can see from the most recent balance sheet that HuiZhou Intelligence Technology Group had liabilities of CN¥1.23b falling due within a year, and liabilities of CN¥36.0m due beyond that. Offsetting this, it had CN¥567.9m in cash and CN¥356.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥340.4m more than its cash and near-term receivables, combined.

Given HuiZhou Intelligence Technology Group has a market capitalization of CN¥4.30b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, HuiZhou Intelligence Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HuiZhou Intelligence Technology Group 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 HuiZhou Intelligence Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥832m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is HuiZhou Intelligence Technology Group?

Although HuiZhou Intelligence Technology Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥81m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for HuiZhou Intelligence Technology Group 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.

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