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.' 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. As with many other companies SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does SanFeng Intelligent Equipment Group Carry?

As you can see below, at the end of September 2024, SanFeng Intelligent Equipment Group had CN¥193.1m of debt, up from CN¥184.9m a year ago. Click the image for more detail. However, it does have CN¥233.2m in cash offsetting this, leading to net cash of CN¥40.2m.

A Look At SanFeng Intelligent Equipment Group's Liabilities

According to the last reported balance sheet, SanFeng Intelligent Equipment Group had liabilities of CN¥2.40b due within 12 months, and liabilities of CN¥21.3m due beyond 12 months. Offsetting this, it had CN¥233.2m in cash and CN¥795.0m in receivables that were due within 12 months. So its liabilities total CN¥1.39b more than the combination of its cash and short-term receivables.

Since publicly traded SanFeng Intelligent Equipment Group shares are worth a total of CN¥13.7b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, SanFeng Intelligent Equipment Group 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 SanFeng Intelligent Equipment Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SanFeng Intelligent Equipment Group reported revenue of CN¥2.0b, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is SanFeng Intelligent Equipment Group?

While SanFeng Intelligent Equipment Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥561k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that SanFeng Intelligent Equipment Group is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SanFeng Intelligent Equipment Group (of which 1 is a bit unpleasant!) you should know about.

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.