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, Loongson Technology Corporation Limited (SHSE:688047) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Loongson Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Loongson Technology had CN¥160.9m of debt, an increase on none, over one year. However, it does have CN¥1.68b in cash offsetting this, leading to net cash of CN¥1.52b.

How Healthy Is Loongson Technology's Balance Sheet?

The latest balance sheet data shows that Loongson Technology had liabilities of CN¥504.6m due within a year, and liabilities of CN¥116.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.68b as well as receivables valued at CN¥626.8m due within 12 months. So it can boast CN¥1.69b more liquid assets than total liabilities.

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

In the last year Loongson Technology had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥508m. That makes us nervous, to say the least.

So How Risky Is Loongson Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Loongson Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥706m of cash and made a loss of CN¥329m. Given it only has net cash of CN¥1.52b, the company may need to raise more capital if it doesn't reach break-even 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 we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Loongson Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.