The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Pylon Technologies Co., Ltd. (SHSE:688063) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Pylon Technologies Carry?

The image below, which you can click on for greater detail, shows that Pylon Technologies had debt of CN¥77.9m at the end of June 2024, a reduction from CN¥214.3m over a year. But it also has CN¥6.30b in cash to offset that, meaning it has CN¥6.22b net cash.

How Healthy Is Pylon Technologies' Balance Sheet?

The latest balance sheet data shows that Pylon Technologies had liabilities of CN¥1.44b due within a year, and liabilities of CN¥1.01b falling due after that. Offsetting this, it had CN¥6.30b in cash and CN¥1.01b in receivables that were due within 12 months. So it can boast CN¥4.86b more liquid assets than total liabilities.

This surplus strongly suggests that Pylon Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Pylon Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Pylon 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.

In the last year Pylon Technologies had a loss before interest and tax, and actually shrunk its revenue by 76%, to CN¥1.6b. That makes us nervous, to say the least.

So How Risky Is Pylon Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Pylon Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥310m of cash and made a loss of CN¥158m. Given it only has net cash of CN¥6.22b, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Pylon Technologies you should be aware of.

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.