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. Importantly, Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Suzhou Wanxiang TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Suzhou Wanxiang TechnologyLtd had debt of CN¥32.5m, up from none in one year. However, its balance sheet shows it holds CN¥104.3m in cash, so it actually has CN¥71.8m net cash.

How Strong Is Suzhou Wanxiang TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Suzhou Wanxiang TechnologyLtd had liabilities of CN¥335.7m due within 12 months, and liabilities of CN¥68.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥104.3m as well as receivables valued at CN¥443.8m due within 12 months. So it can boast CN¥144.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Suzhou Wanxiang TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Suzhou Wanxiang TechnologyLtd 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 Suzhou Wanxiang TechnologyLtd'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.

In the last year Suzhou Wanxiang TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥1.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Suzhou Wanxiang TechnologyLtd?

Although Suzhou Wanxiang TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥14m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example Suzhou Wanxiang TechnologyLtd has 3 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.