Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies RAISECOM TECHNOLOGY CO.,Ltd. (SHSE:603803) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is RAISECOM TECHNOLOGYLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that RAISECOM TECHNOLOGYLtd had CN¥282.2m of debt in September 2024, down from CN¥360.0m, one year before. But it also has CN¥660.9m in cash to offset that, meaning it has CN¥378.6m net cash.

How Strong Is RAISECOM TECHNOLOGYLtd's Balance Sheet?

We can see from the most recent balance sheet that RAISECOM TECHNOLOGYLtd had liabilities of CN¥1.00b falling due within a year, and liabilities of CN¥57.8m due beyond that. On the other hand, it had cash of CN¥660.9m and CN¥747.9m worth of receivables due within a year. So it actually has CN¥349.8m more liquid assets than total liabilities.

This surplus suggests that RAISECOM TECHNOLOGYLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that RAISECOM TECHNOLOGYLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is RAISECOM TECHNOLOGYLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year RAISECOM TECHNOLOGYLtd had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥1.5b. We would much prefer see growth.

So How Risky Is RAISECOM TECHNOLOGYLtd?

While RAISECOM TECHNOLOGYLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥116m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 1 warning sign we've spotted with RAISECOM TECHNOLOGYLtd .

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.