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.' 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. We can see that Skyverse Technology Co., Ltd. (SHSE:688361) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Skyverse Technology's Debt?

As you can see below, Skyverse Technology had CN¥93.0m of debt at March 2024, down from CN¥181.0m a year prior. But on the other hand it also has CN¥1.23b in cash, leading to a CN¥1.14b net cash position.

A Look At Skyverse Technology's Liabilities

According to the last reported balance sheet, Skyverse Technology had liabilities of CN¥990.3m due within 12 months, and liabilities of CN¥142.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥181.3m due within 12 months. So it actually has CN¥277.8m more liquid assets than total liabilities.

Having regard to Skyverse Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥17.9b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Skyverse Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Skyverse Technology turned things around in the last 12 months, delivering and EBIT of CN¥24m. 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 Skyverse Technology 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Skyverse 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 year, Skyverse 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

While it is always sensible to investigate a company's debt, in this case Skyverse Technology has CN¥1.14b in net cash and a decent-looking balance sheet. So we don't have any problem with Skyverse Technology's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Skyverse Technology you should know about.

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.