Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Broadex Technologies Co., Ltd. (SZSE:300548) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. 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.

What Is Broadex Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Broadex Technologies had CN¥513.0m of debt, an increase on CN¥36.2m, over one year. However, it does have CN¥1.37b in cash offsetting this, leading to net cash of CN¥855.3m.

A Look At Broadex Technologies' Liabilities

According to the last reported balance sheet, Broadex Technologies had liabilities of CN¥615.6m due within 12 months, and liabilities of CN¥527.7m due beyond 12 months. Offsetting this, it had CN¥1.37b in cash and CN¥534.6m in receivables that were due within 12 months. So it actually has CN¥759.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Broadex Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Broadex Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Broadex Technologies's EBIT was down 76% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Broadex Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Broadex Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Broadex Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Broadex Technologies has CN¥855.3m in net cash and a decent-looking balance sheet. Despite its cash we think that Broadex Technologies seems to struggle to grow its EBIT, so we are wary of the stock. Even though Broadex Technologies lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending 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.

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