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 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. Importantly, Nanya New Material Technology Co.,Ltd (SHSE:688519) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nanya New Material TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Nanya New Material TechnologyLtd had CN¥281.8m of debt in June 2024, down from CN¥450.2m, one year before. However, its balance sheet shows it holds CN¥356.2m in cash, so it actually has CN¥74.4m net cash.

A Look At Nanya New Material TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Nanya New Material TechnologyLtd had liabilities of CN¥1.86b due within 12 months and liabilities of CN¥197.5m due beyond that. Offsetting this, it had CN¥356.2m in cash and CN¥1.85b in receivables that were due within 12 months. So it can boast CN¥151.7m more liquid assets than total liabilities.

This surplus suggests that Nanya New Material TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanya New Material TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Nanya New Material 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 Nanya New Material TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 7.5%, to CN¥3.1b. That's not what we would hope to see.

So How Risky Is Nanya New Material TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Nanya New Material TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥36m of cash and made a loss of CN¥38m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥74.4m. 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. Case in point: We've spotted 3 warning signs for Nanya New Material TechnologyLtd you should be aware of, and 2 of them make us uncomfortable.

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.