Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that State Power Rixin Technology Co., Ltd. (SZSE:301162) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is State Power Rixin Technology's Net Debt?

As you can see below, at the end of September 2024, State Power Rixin Technology had CN¥32.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥555.5m in cash, so it actually has CN¥522.8m net cash.

How Strong Is State Power Rixin Technology's Balance Sheet?

The latest balance sheet data shows that State Power Rixin Technology had liabilities of CN¥361.1m due within a year, and liabilities of CN¥74.9m falling due after that. Offsetting this, it had CN¥555.5m in cash and CN¥415.5m in receivables that were due within 12 months. So it can boast CN¥535.1m more liquid assets than total liabilities.

This short term liquidity is a sign that State Power Rixin Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that State Power Rixin Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that State Power Rixin Technology has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if State Power Rixin Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While State Power Rixin Technology 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 three years, State Power Rixin Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case State Power Rixin Technology has CN¥522.8m in net cash and a decent-looking balance sheet. So we don't have any problem with State Power Rixin Technology's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with State Power Rixin Technology (including 1 which doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.