Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Optowide Technologies Co., Ltd. (SHSE:688195) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Optowide Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Optowide Technologies had CN¥145.6m of debt, an increase on CN¥21.7m, over one year. However, its balance sheet shows it holds CN¥210.3m in cash, so it actually has CN¥64.7m net cash.

How Strong Is Optowide Technologies' Balance Sheet?

The latest balance sheet data shows that Optowide Technologies had liabilities of CN¥261.4m due within a year, and liabilities of CN¥53.7m falling due after that. Offsetting these obligations, it had cash of CN¥210.3m as well as receivables valued at CN¥196.9m due within 12 months. So it can boast CN¥92.0m more liquid assets than total liabilities.

Having regard to Optowide Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.33b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Optowide Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Optowide Technologies grew its EBIT by 111% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Optowide Technologies'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Optowide 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. Considering the last three years, Optowide Technologies actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Optowide Technologies has CN¥64.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 111% year-on-year EBIT growth. So we don't have any problem with Optowide Technologies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Optowide Technologies is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.