Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that LUSTER LightTech Co., LTD. (SHSE:688400) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is LUSTER LightTech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 LUSTER LightTech had CN¥106.8m of debt, an increase on CN¥40.0m, over one year. However, it does have CN¥2.08b in cash offsetting this, leading to net cash of CN¥1.97b.

A Look At LUSTER LightTech's Liabilities

Zooming in on the latest balance sheet data, we can see that LUSTER LightTech had liabilities of CN¥738.7m due within 12 months and liabilities of CN¥290.4m due beyond that. Offsetting these obligations, it had cash of CN¥2.08b as well as receivables valued at CN¥1.14b due within 12 months. So it can boast CN¥2.19b more liquid assets than total liabilities.

It's good to see that LUSTER LightTech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, LUSTER LightTech boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LUSTER LightTech'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 LUSTER LightTech had a loss before interest and tax, and actually shrunk its revenue by 8.7%, to CN¥2.5b. That's not what we would hope to see.

So How Risky Is LUSTER LightTech?

While LUSTER LightTech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥147m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 2 warning signs with LUSTER LightTech , and understanding them should be part of your investment process.

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.

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