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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that NSFOCUS Technologies Group Co., Ltd. (SZSE:300369) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

How Much Debt Does NSFOCUS Technologies Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 NSFOCUS Technologies Group had debt of CN¥468.3m, up from CN¥35.9m in one year. However, it does have CN¥716.4m in cash offsetting this, leading to net cash of CN¥248.0m.

A Look At NSFOCUS Technologies Group's Liabilities

According to the last reported balance sheet, NSFOCUS Technologies Group had liabilities of CN¥1.34b due within 12 months, and liabilities of CN¥388.3m due beyond 12 months. On the other hand, it had cash of CN¥716.4m and CN¥1.36b worth of receivables due within a year. So it actually has CN¥346.2m more liquid assets than total liabilities.

This surplus suggests that NSFOCUS Technologies Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NSFOCUS Technologies Group 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 NSFOCUS Technologies Group 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.

In the last year NSFOCUS Technologies Group had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥1.8b. To be frank that doesn't bode well.

So How Risky Is NSFOCUS Technologies Group?

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 NSFOCUS Technologies Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥127m and booked a CN¥817m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥248.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for NSFOCUS Technologies Group that you should be aware of before investing here.

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.

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