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.' 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 note that Zhejiang VIE Science & Technology Co., Ltd. (SZSE:002590) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang VIE Science & Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang VIE Science & Technology had CN¥571.5m of debt in March 2024, down from CN¥619.8m, one year before. However, it does have CN¥782.5m in cash offsetting this, leading to net cash of CN¥210.9m.

A Look At Zhejiang VIE Science & Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang VIE Science & Technology had liabilities of CN¥2.53b due within 12 months and liabilities of CN¥350.5m due beyond that. Offsetting these obligations, it had cash of CN¥782.5m as well as receivables valued at CN¥1.68b due within 12 months. So it has liabilities totalling CN¥414.7m more than its cash and near-term receivables, combined.

Given Zhejiang VIE Science & Technology has a market capitalization of CN¥6.35b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Zhejiang VIE Science & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Zhejiang VIE Science & Technology grew its EBIT by 1,576% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhejiang VIE Science & Technology will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zhejiang VIE Science & Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Zhejiang VIE Science & Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Zhejiang VIE Science & Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥210.9m. And it impressed us with its EBIT growth of 1,576% over the last year. So we don't have any problem with Zhejiang VIE Science & Technology's use of debt. 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 example - Zhejiang VIE Science & Technology has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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