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 Shenzhen Intellifusion Technologies Co., Ltd. (SHSE:688343) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Shenzhen Intellifusion Technologies's Debt?

As you can see below, at the end of September 2024, Shenzhen Intellifusion Technologies had CN¥109.6m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.56b in cash, so it actually has CN¥1.45b net cash.

How Healthy Is Shenzhen Intellifusion Technologies' Balance Sheet?

The latest balance sheet data shows that Shenzhen Intellifusion Technologies had liabilities of CN¥712.6m due within a year, and liabilities of CN¥69.5m falling due after that. On the other hand, it had cash of CN¥1.56b and CN¥617.8m worth of receivables due within a year. So it actually has CN¥1.39b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Intellifusion Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhen Intellifusion Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Shenzhen Intellifusion Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shenzhen Intellifusion Technologies reported revenue of CN¥762m, which is a gain of 47%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shenzhen Intellifusion Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shenzhen Intellifusion Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.2b of cash and made a loss of CN¥510m. Given it only has net cash of CN¥1.45b, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Shenzhen Intellifusion Technologies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 3 warning signs with Shenzhen Intellifusion Technologies (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.