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.' 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 Nanjing Panda Electronics Company Limited (SHSE:600775) 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Nanjing Panda Electronics's Debt?

As you can see below, at the end of March 2024, Nanjing Panda Electronics had CN¥26.4m of debt, up from CN¥18.1m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.38b in cash, leading to a CN¥1.36b net cash position.

How Healthy Is Nanjing Panda Electronics' Balance Sheet?

We can see from the most recent balance sheet that Nanjing Panda Electronics had liabilities of CN¥1.72b falling due within a year, and liabilities of CN¥57.3m due beyond that. On the other hand, it had cash of CN¥1.38b and CN¥1.35b worth of receivables due within a year. So it actually has CN¥958.0m more liquid assets than total liabilities.

It's good to see that Nanjing Panda Electronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Nanjing Panda Electronics 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 ultimately the future profitability of the business will decide if Nanjing Panda Electronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nanjing Panda Electronics had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥2.8b. That makes us nervous, to say the least.

So How Risky Is Nanjing Panda Electronics?

While Nanjing Panda Electronics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥60m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Nanjing Panda Electronics's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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