Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cubic Digital Technology Co.,Ltd. (SZSE:300344) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

What Is Cubic Digital TechnologyLtd's Debt?

As you can see below, Cubic Digital TechnologyLtd had CN¥25.0m of debt at September 2024, down from CN¥30.0m a year prior. However, it does have CN¥45.8m in cash offsetting this, leading to net cash of CN¥20.8m.

How Healthy Is Cubic Digital TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cubic Digital TechnologyLtd had liabilities of CN¥190.0m due within 12 months and liabilities of CN¥5.10m due beyond that. Offsetting this, it had CN¥45.8m in cash and CN¥234.8m in receivables that were due within 12 months. So it actually has CN¥85.6m more liquid assets than total liabilities.

This surplus suggests that Cubic Digital TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cubic Digital TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cubic Digital TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cubic Digital TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 99%, to CN¥286m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Cubic Digital TechnologyLtd?

Although Cubic Digital TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥35m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 99% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. For instance, we've identified 1 warning sign for Cubic Digital TechnologyLtd that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.