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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that BlueFocus Intelligent Communications Group Co., Ltd. (SZSE:300058) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does BlueFocus Intelligent Communications Group Carry?

As you can see below, BlueFocus Intelligent Communications Group had CN¥2.21b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥3.87b in cash offsetting this, leading to net cash of CN¥1.66b.

How Healthy Is BlueFocus Intelligent Communications Group's Balance Sheet?

We can see from the most recent balance sheet that BlueFocus Intelligent Communications Group had liabilities of CN¥12.5b falling due within a year, and liabilities of CN¥784.0m due beyond that. Offsetting this, it had CN¥3.87b in cash and CN¥10.9b in receivables that were due within 12 months. So it actually has CN¥1.52b more liquid assets than total liabilities.

This surplus suggests that BlueFocus Intelligent Communications Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BlueFocus Intelligent Communications Group 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 BlueFocus Intelligent Communications Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BlueFocus Intelligent Communications Group reported revenue of CN¥62b, which is a gain of 33%, 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 BlueFocus Intelligent Communications Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that BlueFocus Intelligent Communications Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥145m and booked a CN¥48m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.66b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, BlueFocus Intelligent Communications Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for BlueFocus Intelligent Communications Group you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.