Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Bear Electric Appliance Co.,Ltd. (SZSE:002959) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Bear Electric ApplianceLtd

What Is Bear Electric ApplianceLtd's Debt?

As you can see below, at the end of September 2023, Bear Electric ApplianceLtd had CN¥481.4m of debt, up from CN¥451.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.76b in cash, so it actually has CN¥2.28b net cash.

How Healthy Is Bear Electric ApplianceLtd's Balance Sheet?

According to the last reported balance sheet, Bear Electric ApplianceLtd had liabilities of CN¥1.93b due within 12 months, and liabilities of CN¥464.8m due beyond 12 months. Offsetting this, it had CN¥2.76b in cash and CN¥88.2m in receivables that were due within 12 months. So it can boast CN¥457.1m more liquid assets than total liabilities.

This surplus suggests that Bear Electric ApplianceLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bear Electric ApplianceLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Bear Electric ApplianceLtd has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Bear Electric ApplianceLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Bear Electric ApplianceLtd 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. During the last three years, Bear Electric ApplianceLtd produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bear Electric ApplianceLtd has net cash of CN¥2.28b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 24% over the last year. So we don't think Bear Electric ApplianceLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Bear Electric ApplianceLtd (1 is significant) 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.