Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Sinodata Co., Ltd. (SZSE:002657) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sinodata's Net Debt?

As you can see below, at the end of March 2024, Sinodata had CN¥35.8m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥673.2m in cash, leading to a CN¥637.3m net cash position.

How Healthy Is Sinodata's Balance Sheet?

According to the last reported balance sheet, Sinodata had liabilities of CN¥562.3m due within 12 months, and liabilities of CN¥12.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥673.2m as well as receivables valued at CN¥117.0m due within 12 months. So it actually has CN¥215.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Sinodata could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sinodata has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Sinodata's earnings that will influence how the balance sheet holds up in the future. 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 Sinodata had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥860m. That makes us nervous, to say the least.

So How Risky Is Sinodata?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Sinodata had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥209m and booked a CN¥122m accounting loss. But the saving grace is the CN¥637.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sinodata 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.