The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Yanhua Smartech Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Yanhua Smartech Group had CN¥109.5m of debt in September 2024, down from CN¥164.8m, one year before. But on the other hand it also has CN¥136.8m in cash, leading to a CN¥27.3m net cash position.

How Strong Is Shanghai Yanhua Smartech Group's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Yanhua Smartech Group had liabilities of CN¥741.6m falling due within a year, and liabilities of CN¥79.5m due beyond that. Offsetting this, it had CN¥136.8m in cash and CN¥669.9m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Shanghai Yanhua Smartech Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥5.88b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shanghai Yanhua Smartech Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Yanhua Smartech Group 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.

In the last year Shanghai Yanhua Smartech Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥619m. That's not what we would hope to see.

So How Risky Is Shanghai Yanhua Smartech Group?

Although Shanghai Yanhua Smartech Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥5.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shanghai Yanhua Smartech Group has 2 warning signs (and 1 which is concerning) we think 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.