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 note that Shenzhen Silver Basis Technology Co., Ltd. (SZSE:002786) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Shenzhen Silver Basis Technology Carry?

As you can see below, at the end of June 2024, Shenzhen Silver Basis Technology had CN¥1.68b of debt, up from CN¥1.60b a year ago. Click the image for more detail. However, it also had CN¥120.9m in cash, and so its net debt is CN¥1.56b.

A Look At Shenzhen Silver Basis Technology's Liabilities

According to the last reported balance sheet, Shenzhen Silver Basis Technology had liabilities of CN¥2.87b due within 12 months, and liabilities of CN¥503.5m due beyond 12 months. On the other hand, it had cash of CN¥120.9m and CN¥549.1m worth of receivables due within a year. So its liabilities total CN¥2.70b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shenzhen Silver Basis Technology has a market capitalization of CN¥5.98b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Shenzhen Silver Basis 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 Shenzhen Silver Basis Technology had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to CN¥2.3b. We would much prefer see growth.

Caveat Emptor

Importantly, Shenzhen Silver Basis Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥257m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥46m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Shenzhen Silver Basis Technology (1 is concerning) 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.