David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Hubei DOTI Micro Technology Co., Ltd. (SZSE:301183) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Hubei DOTI Micro Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hubei DOTI Micro Technology had CN¥35.5m of debt, an increase on CN¥10.0m, over one year. However, its balance sheet shows it holds CN¥359.1m in cash, so it actually has CN¥323.6m net cash.

A Look At Hubei DOTI Micro Technology's Liabilities

We can see from the most recent balance sheet that Hubei DOTI Micro Technology had liabilities of CN¥322.8m falling due within a year, and liabilities of CN¥30.7m due beyond that. Offsetting these obligations, it had cash of CN¥359.1m as well as receivables valued at CN¥343.9m due within 12 months. So it actually has CN¥349.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Hubei DOTI Micro Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Hubei DOTI Micro Technology 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 Hubei DOTI Micro Technology 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 Hubei DOTI Micro Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to CN¥416m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hubei DOTI Micro Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Hubei DOTI Micro Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥87m and booked a CN¥20m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥323.6m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Hubei DOTI Micro Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hubei DOTI Micro Technology that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com