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 note that Streamax Technology Co., Ltd. (SZSE:002970) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Streamax Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Streamax Technology had CN¥207.1m of debt in September 2024, down from CN¥243.7m, one year before. But it also has CN¥954.6m in cash to offset that, meaning it has CN¥747.5m net cash.

How Strong Is Streamax Technology's Balance Sheet?

According to the last reported balance sheet, Streamax Technology had liabilities of CN¥1.25b due within 12 months, and liabilities of CN¥66.7m due beyond 12 months. On the other hand, it had cash of CN¥954.6m and CN¥657.5m worth of receivables due within a year. So it actually has CN¥296.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Streamax Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Streamax Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Streamax Technology grew its EBIT by 1,103% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Streamax 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. Streamax 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. Happily for any shareholders, Streamax Technology actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Streamax Technology has net cash of CN¥747.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 257% of that EBIT to free cash flow, bringing in CN¥309m. So we don't think Streamax Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Streamax Technology has 1 warning sign we think 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.