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 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 BIWIN Storage Technology Co., Ltd. (SHSE:688525) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is BIWIN Storage Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 BIWIN Storage Technology had debt of CN¥3.53b, up from CN¥2.38b in one year. However, it also had CN¥679.9m in cash, and so its net debt is CN¥2.85b.

A Look At BIWIN Storage Technology's Liabilities

The latest balance sheet data shows that BIWIN Storage Technology had liabilities of CN¥3.75b due within a year, and liabilities of CN¥572.5m falling due after that. Offsetting these obligations, it had cash of CN¥679.9m as well as receivables valued at CN¥681.0m due within 12 months. So its liabilities total CN¥2.96b more than the combination of its cash and short-term receivables.

Given BIWIN Storage Technology has a market capitalization of CN¥23.9b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BIWIN Storage Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year BIWIN Storage Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to CN¥4.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though BIWIN Storage Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥331m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥1.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with BIWIN Storage Technology .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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