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 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 Shanghai Bolex Food Technology Co., Ltd. (SHSE:603170) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Bolex Food Technology's Net Debt?

As you can see below, at the end of June 2024, Shanghai Bolex Food Technology had CN¥150.0m of debt, up from CN¥22.0m a year ago. Click the image for more detail. But it also has CN¥574.1m in cash to offset that, meaning it has CN¥424.1m net cash.

How Healthy Is Shanghai Bolex Food Technology's Balance Sheet?

According to the last reported balance sheet, Shanghai Bolex Food Technology had liabilities of CN¥431.2m due within 12 months, and liabilities of CN¥80.7m due beyond 12 months. On the other hand, it had cash of CN¥574.1m and CN¥298.5m worth of receivables due within a year. So it can boast CN¥360.7m more liquid assets than total liabilities.

This surplus suggests that Shanghai Bolex Food Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Bolex Food Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Shanghai Bolex Food Technology's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai Bolex Food Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Bolex Food Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Shanghai Bolex Food Technology recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Bolex Food Technology has net cash of CN¥424.1m, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Bolex Food Technology's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Shanghai Bolex Food Technology (including 1 which is significant) .

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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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.