Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Zhe Jiang Dali Technology Co.,Ltd (SZSE:002214) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zhe Jiang Dali TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhe Jiang Dali TechnologyLtd had CN¥343.7m of debt, an increase on CN¥191.7m, over one year. However, it also had CN¥204.3m in cash, and so its net debt is CN¥139.3m.

How Strong Is Zhe Jiang Dali TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhe Jiang Dali TechnologyLtd had liabilities of CN¥393.8m due within 12 months and liabilities of CN¥203.9m due beyond that. Offsetting this, it had CN¥204.3m in cash and CN¥569.6m in receivables that were due within 12 months. So it can boast CN¥176.2m more liquid assets than total liabilities.

This surplus suggests that Zhe Jiang Dali TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhe Jiang Dali 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.

Over 12 months, Zhe Jiang Dali TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥179m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While Zhe Jiang Dali TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥394m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 Zhe Jiang Dali TechnologyLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.