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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Elec-Tech International Co., Ltd. (SZSE:002005) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Elec-Tech International Carry?

The image below, which you can click on for greater detail, shows that Elec-Tech International had debt of CN¥62.9m at the end of September 2024, a reduction from CN¥86.3m over a year. But on the other hand it also has CN¥130.1m in cash, leading to a CN¥67.1m net cash position.

How Healthy Is Elec-Tech International's Balance Sheet?

The latest balance sheet data shows that Elec-Tech International had liabilities of CN¥804.5m due within a year, and liabilities of CN¥74.5m falling due after that. On the other hand, it had cash of CN¥130.1m and CN¥273.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥475.9m.

Of course, Elec-Tech International has a market capitalization of CN¥3.67b, 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. While it does have liabilities worth noting, Elec-Tech International also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Elec-Tech International will need earnings to service that debt. 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, Elec-Tech International made a loss at the EBIT level, and saw its revenue drop to CN¥743m, which is a fall of 6.9%. We would much prefer see growth.

So How Risky Is Elec-Tech International?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Elec-Tech International lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥165m of cash and made a loss of CN¥75m. Given it only has net cash of CN¥67.1m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Elec-Tech International you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.