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 C*Core Technology Co., Ltd. (SHSE:688262) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does C*Core Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2024 C*Core Technology had debt of CN¥155.1m, up from CN¥66.6m in one year. But it also has CN¥1.00b in cash to offset that, meaning it has CN¥846.0m net cash.

How Strong Is C*Core Technology's Balance Sheet?

According to the last reported balance sheet, C*Core Technology had liabilities of CN¥984.7m due within 12 months, and liabilities of CN¥24.0m due beyond 12 months. Offsetting this, it had CN¥1.00b in cash and CN¥352.9m in receivables that were due within 12 months. So it actually has CN¥345.3m more liquid assets than total liabilities.

This short term liquidity is a sign that C*Core Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that C*Core Technology has more cash than debt is arguably a good indication that 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 C*Core Technology 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 C*Core Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥463m. That's not what we would hope to see.

So How Risky Is C*Core Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months C*Core Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥370m and booked a CN¥216m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥846.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for C*Core Technology that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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