Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Zhuhai Bojay Electronics Co.,Ltd. (SZSE:002975) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Zhuhai Bojay ElectronicsLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Zhuhai Bojay ElectronicsLtd had CN¥607.9m in debt in September 2024; about the same as the year before. But it also has CN¥804.2m in cash to offset that, meaning it has CN¥196.2m net cash.

How Strong Is Zhuhai Bojay ElectronicsLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhuhai Bojay ElectronicsLtd had liabilities of CN¥504.2m falling due within a year, and liabilities of CN¥521.2m due beyond that. On the other hand, it had cash of CN¥804.2m and CN¥600.2m worth of receivables due within a year. So it can boast CN¥378.9m more liquid assets than total liabilities.

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

In the last year Zhuhai Bojay ElectronicsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.0%, to CN¥1.1b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zhuhai Bojay ElectronicsLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Zhuhai Bojay ElectronicsLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥269m of cash and made a loss of CN¥50m. With only CN¥196.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. 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 Zhuhai Bojay ElectronicsLtd 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.