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. As with many other companies Sichuan Huafeng Technology Co., LTD. (SHSE:688629) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Sichuan Huafeng Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Sichuan Huafeng Technology had CN¥318.4m of debt, an increase on CN¥297.3m, over one year. However, its balance sheet shows it holds CN¥548.4m in cash, so it actually has CN¥230.0m net cash.

How Strong Is Sichuan Huafeng Technology's Balance Sheet?

The latest balance sheet data shows that Sichuan Huafeng Technology had liabilities of CN¥667.3m due within a year, and liabilities of CN¥526.1m falling due after that. Offsetting this, it had CN¥548.4m in cash and CN¥675.8m in receivables that were due within 12 months. So it actually has CN¥30.9m more liquid assets than total liabilities.

This state of affairs indicates that Sichuan Huafeng Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥12.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Sichuan Huafeng Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sichuan Huafeng Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Sichuan Huafeng Technology reported revenue of CN¥972m, which is a gain of 6.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sichuan Huafeng Technology?

While Sichuan Huafeng Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥17m. 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 mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 3 warning signs for Sichuan Huafeng Technology (2 don't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.