Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Sino Wealth Electronic Ltd. (SZSE:300327) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sino Wealth Electronic's Net Debt?

As you can see below, at the end of June 2024, Sino Wealth Electronic had CN¥60.3m of debt, up from CN¥30.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥413.3m in cash, leading to a CN¥353.1m net cash position.

How Strong Is Sino Wealth Electronic's Balance Sheet?

The latest balance sheet data shows that Sino Wealth Electronic had liabilities of CN¥355.2m due within a year, and liabilities of CN¥3.05m falling due after that. Offsetting this, it had CN¥413.3m in cash and CN¥278.0m in receivables that were due within 12 months. So it can boast CN¥333.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Sino Wealth Electronic could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sino Wealth Electronic 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 ultimately the future profitability of the business will decide if Sino Wealth Electronic can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sino Wealth Electronic saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Sino Wealth Electronic?

While Sino Wealth Electronic lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥172m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Sino Wealth Electronic you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.