Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shandong New Beiyang Information Technology Co., Ltd. (SZSE:002376) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shandong New Beiyang Information Technology

What Is Shandong New Beiyang Information Technology's Debt?

The chart below, which you can click on for greater detail, shows that Shandong New Beiyang Information Technology had CN¥1.59b in debt in March 2023; about the same as the year before. However, because it has a cash reserve of CN¥914.5m, its net debt is less, at about CN¥671.3m.

How Healthy Is Shandong New Beiyang Information Technology's Balance Sheet?

We can see from the most recent balance sheet that Shandong New Beiyang Information Technology had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥873.2m due beyond that. Offsetting this, it had CN¥914.5m in cash and CN¥737.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥502.5m.

Since publicly traded Shandong New Beiyang Information Technology shares are worth a total of CN¥4.97b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shandong New Beiyang Information Technology'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 Shandong New Beiyang Information Technology had a loss before interest and tax, and actually shrunk its revenue by 9.1%, to CN¥2.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Shandong New Beiyang Information Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥28m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥24m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Shandong New Beiyang Information Technology (including 1 which makes us a bit uncomfortable) .

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.

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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.