David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Shenzhen Etmade Automatic Equipment Co., Ltd. (SZSE:300812) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Etmade Automatic Equipment's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Etmade Automatic Equipment had debt of CN¥85.3m, up from CN¥34.6m in one year. However, its balance sheet shows it holds CN¥93.6m in cash, so it actually has CN¥8.28m net cash.

How Strong Is Shenzhen Etmade Automatic Equipment's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Etmade Automatic Equipment had liabilities of CN¥572.8m falling due within a year, and liabilities of CN¥17.5m due beyond that. Offsetting these obligations, it had cash of CN¥93.6m as well as receivables valued at CN¥332.3m due within 12 months. So it has liabilities totalling CN¥164.3m more than its cash and near-term receivables, combined.

Given Shenzhen Etmade Automatic Equipment has a market capitalization of CN¥3.63b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shenzhen Etmade Automatic Equipment also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Etmade Automatic Equipment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenzhen Etmade Automatic Equipment made a loss at the EBIT level, and saw its revenue drop to CN¥426m, which is a fall of 35%. That makes us nervous, to say the least.

So How Risky Is Shenzhen Etmade Automatic Equipment?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Shenzhen Etmade Automatic Equipment had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥116m and booked a CN¥22m accounting loss. With only CN¥8.28m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shenzhen Etmade Automatic Equipment (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.