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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Suzhou UIGreen Micro&Nano Technologies Co.,Ltd (SHSE:688661) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Suzhou UIGreen Micro&Nano TechnologiesLtd's Debt?

As you can see below, at the end of September 2024, Suzhou UIGreen Micro&Nano TechnologiesLtd had CN¥41.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥681.6m in cash, leading to a CN¥639.8m net cash position.

How Healthy Is Suzhou UIGreen Micro&Nano TechnologiesLtd's Balance Sheet?

According to the last reported balance sheet, Suzhou UIGreen Micro&Nano TechnologiesLtd had liabilities of CN¥190.7m due within 12 months, and liabilities of CN¥15.4m due beyond 12 months. Offsetting this, it had CN¥681.6m in cash and CN¥174.3m in receivables that were due within 12 months. So it can boast CN¥649.7m more liquid assets than total liabilities.

This surplus suggests that Suzhou UIGreen Micro&Nano TechnologiesLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Suzhou UIGreen Micro&Nano TechnologiesLtd 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 it is future earnings, more than anything, that will determine Suzhou UIGreen Micro&Nano TechnologiesLtd'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.

Over 12 months, Suzhou UIGreen Micro&Nano TechnologiesLtd reported revenue of CN¥477m, which is a gain of 99%, 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 Suzhou UIGreen Micro&Nano TechnologiesLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Suzhou UIGreen Micro&Nano TechnologiesLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥133m of cash and made a loss of CN¥9.2m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥639.8m. That means it could keep spending at its current rate for more than two years. Suzhou UIGreen Micro&Nano TechnologiesLtd'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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Suzhou UIGreen Micro&Nano TechnologiesLtd .

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.

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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.