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 can see that Shenzhen Prolto Supply Chain Management Co.,Ltd (SZSE:002769) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Prolto Supply Chain ManagementLtd's Debt?

As you can see below, Shenzhen Prolto Supply Chain ManagementLtd had CN¥354.4m of debt at September 2024, down from CN¥2.74b a year prior. However, its balance sheet shows it holds CN¥491.8m in cash, so it actually has CN¥137.4m net cash.

A Look At Shenzhen Prolto Supply Chain ManagementLtd's Liabilities

The latest balance sheet data shows that Shenzhen Prolto Supply Chain ManagementLtd had liabilities of CN¥9.02b due within a year, and liabilities of CN¥57.8m falling due after that. Offsetting these obligations, it had cash of CN¥491.8m as well as receivables valued at CN¥8.99b due within 12 months. So it actually has CN¥399.3m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Prolto Supply Chain ManagementLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shenzhen Prolto Supply Chain ManagementLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Shenzhen Prolto Supply Chain ManagementLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥13m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Prolto Supply Chain ManagementLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen Prolto Supply Chain ManagementLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Shenzhen Prolto Supply Chain ManagementLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Prolto Supply Chain ManagementLtd has CN¥137.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Shenzhen Prolto Supply Chain ManagementLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shenzhen Prolto Supply Chain ManagementLtd , and understanding them should be part of your investment process.

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.