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.' 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 can see that SBT Ultrasonic Technology Co.,Ltd. (SHSE:688392) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

How Much Debt Does SBT Ultrasonic TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 SBT Ultrasonic TechnologyLtd had CN¥238.4m of debt, an increase on CN¥207.3m, over one year. But on the other hand it also has CN¥1.38b in cash, leading to a CN¥1.14b net cash position.

A Look At SBT Ultrasonic TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that SBT Ultrasonic TechnologyLtd had liabilities of CN¥392.8m due within 12 months and liabilities of CN¥11.7m due beyond that. On the other hand, it had cash of CN¥1.38b and CN¥352.2m worth of receivables due within a year. So it can boast CN¥1.33b more liquid assets than total liabilities.

It's good to see that SBT Ultrasonic TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, SBT Ultrasonic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SBT Ultrasonic TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, SBT Ultrasonic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥483m, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is SBT Ultrasonic TechnologyLtd?

Although SBT Ultrasonic TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥37m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 2 warning signs for SBT Ultrasonic TechnologyLtd that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com