Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Shen Zhen Australis Electronic Technology Co.,Ltd. (SZSE:300940) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Shen Zhen Australis Electronic TechnologyLtd Carry?

As you can see below, at the end of December 2023, Shen Zhen Australis Electronic TechnologyLtd had CN¥46.1m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥474.1m in cash offsetting this, leading to net cash of CN¥428.0m.

How Healthy Is Shen Zhen Australis Electronic TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shen Zhen Australis Electronic TechnologyLtd had liabilities of CN¥352.8m due within 12 months and liabilities of CN¥100.7m due beyond that. Offsetting these obligations, it had cash of CN¥474.1m as well as receivables valued at CN¥301.7m due within 12 months. So it can boast CN¥322.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Shen Zhen Australis Electronic TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shen Zhen Australis Electronic TechnologyLtd 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 Shen Zhen Australis Electronic TechnologyLtd 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 Shen Zhen Australis Electronic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥469m. To be frank that doesn't bode well.

So How Risky Is Shen Zhen Australis Electronic TechnologyLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shen Zhen Australis Electronic TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥17m of cash and made a loss of CN¥305m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥428.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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 analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shen Zhen Australis Electronic TechnologyLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.