Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies InfoVision Optoelectronics (Kunshan) Co., Ltd. (SHSE:688055) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is InfoVision Optoelectronics (Kunshan)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 InfoVision Optoelectronics (Kunshan) had CN¥1.36b of debt, an increase on CN¥1.06b, over one year. However, because it has a cash reserve of CN¥1.23b, its net debt is less, at about CN¥129.9m.

How Strong Is InfoVision Optoelectronics (Kunshan)'s Balance Sheet?

The latest balance sheet data shows that InfoVision Optoelectronics (Kunshan) had liabilities of CN¥2.35b due within a year, and liabilities of CN¥422.1m falling due after that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥504.0m due within 12 months. So its liabilities total CN¥1.04b more than the combination of its cash and short-term receivables.

Of course, InfoVision Optoelectronics (Kunshan) has a market capitalization of CN¥14.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, InfoVision Optoelectronics (Kunshan) has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is InfoVision Optoelectronics (Kunshan)'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, InfoVision Optoelectronics (Kunshan) saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months InfoVision Optoelectronics (Kunshan) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥368m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥211m into a profit. So to be blunt we do think it is risky. 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 instance, we've identified 2 warning signs for InfoVision Optoelectronics (Kunshan) (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.