Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 ShenzhenJingQuanHua Electronics Co.,Ltd. (SZSE:002885) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is ShenzhenJingQuanHua ElectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 ShenzhenJingQuanHua ElectronicsLtd had CN¥484.0m of debt, an increase on CN¥348.3m, over one year. However, it does have CN¥720.4m in cash offsetting this, leading to net cash of CN¥236.4m.

How Strong Is ShenzhenJingQuanHua ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that ShenzhenJingQuanHua ElectronicsLtd had liabilities of CN¥1.59b due within a year, and liabilities of CN¥135.4m falling due after that. On the other hand, it had cash of CN¥720.4m and CN¥1.05b worth of receivables due within a year. So it can boast CN¥44.2m more liquid assets than total liabilities.

Having regard to ShenzhenJingQuanHua ElectronicsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ShenzhenJingQuanHua ElectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ShenzhenJingQuanHua ElectronicsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ShenzhenJingQuanHua ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 3.3%, to CN¥2.7b. We would much prefer see growth.

So How Risky Is ShenzhenJingQuanHua ElectronicsLtd?

Although ShenzhenJingQuanHua ElectronicsLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥3.5m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for ShenzhenJingQuanHua ElectronicsLtd you should be aware of.

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.

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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.