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 note that CloudWalk Technology Co., Ltd. (SHSE:688327) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does CloudWalk Technology Carry?

As you can see below, CloudWalk Technology had CN¥372.8m of debt at September 2024, down from CN¥648.8m a year prior. But on the other hand it also has CN¥792.0m in cash, leading to a CN¥419.3m net cash position.

How Strong Is CloudWalk Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CloudWalk Technology had liabilities of CN¥808.6m due within 12 months and liabilities of CN¥241.4m due beyond that. Offsetting this, it had CN¥792.0m in cash and CN¥661.2m in receivables that were due within 12 months. So it can boast CN¥403.3m more liquid assets than total liabilities.

This surplus suggests that CloudWalk Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CloudWalk Technology 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 it is CloudWalk Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, CloudWalk Technology reported revenue of CN¥509m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is CloudWalk Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CloudWalk Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥368m of cash and made a loss of CN¥749m. But at least it has CN¥419.3m on the balance sheet to spend on growth, near-term. CloudWalk Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should be aware of the 1 warning sign we've spotted with CloudWalk Technology .

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.