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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is EFORT Intelligent Equipment's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 EFORT Intelligent Equipment had CN¥731.6m of debt, an increase on CN¥634.5m, over one year. However, it also had CN¥696.4m in cash, and so its net debt is CN¥35.2m.

A Look At EFORT Intelligent Equipment's Liabilities

According to the last reported balance sheet, EFORT Intelligent Equipment had liabilities of CN¥1.05b due within 12 months, and liabilities of CN¥600.6m due beyond 12 months. On the other hand, it had cash of CN¥696.4m and CN¥1.27b worth of receivables due within a year. So it actually has CN¥310.7m more liquid assets than total liabilities.

This short term liquidity is a sign that EFORT Intelligent Equipment could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, EFORT Intelligent Equipment has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is EFORT Intelligent Equipment'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, EFORT Intelligent Equipment made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did EFORT Intelligent Equipment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥211m. 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. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that EFORT Intelligent Equipment is showing 1 warning sign in our investment analysis , 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.