Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) makes use of debt. But is this debt a concern to shareholders?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Huizhou Speed Wireless TechnologyLtd's Net Debt?

As you can see below, at the end of December 2023, Huizhou Speed Wireless TechnologyLtd had CN¥947.6m of debt, up from CN¥825.6m a year ago. Click the image for more detail. On the flip side, it has CN¥454.5m in cash leading to net debt of about CN¥493.1m.

How Strong Is Huizhou Speed Wireless TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Huizhou Speed Wireless TechnologyLtd had liabilities of CN¥1.51b due within a year, and liabilities of CN¥283.7m falling due after that. Offsetting these obligations, it had cash of CN¥454.5m as well as receivables valued at CN¥771.2m due within 12 months. So its liabilities total CN¥564.1m more than the combination of its cash and short-term receivables.

Since publicly traded Huizhou Speed Wireless TechnologyLtd shares are worth a total of CN¥4.42b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Huizhou Speed Wireless 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, Huizhou Speed Wireless TechnologyLtd reported revenue of CN¥1.7b, which is a gain of 6.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Huizhou Speed Wireless TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥82m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥319m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Huizhou Speed Wireless TechnologyLtd , and understanding them should be part of your investment process.

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.