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 note that Sharetronic Data Technology Co., Ltd. (SZSE:300857) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

What Is Sharetronic Data Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sharetronic Data Technology had debt of CN¥1.54b, up from CN¥575.7m in one year. However, it does have CN¥1.75b in cash offsetting this, leading to net cash of CN¥208.3m.

How Healthy Is Sharetronic Data Technology's Balance Sheet?

We can see from the most recent balance sheet that Sharetronic Data Technology had liabilities of CN¥2.82b falling due within a year, and liabilities of CN¥128.6m due beyond that. Offsetting this, it had CN¥1.75b in cash and CN¥1.31b in receivables that were due within 12 months. So it actually has CN¥108.8m more liquid assets than total liabilities.

This state of affairs indicates that Sharetronic Data Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥13.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Sharetronic Data Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Sharetronic Data Technology grew its EBIT by 247% last year, which is an impressive improvement. 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 it is future earnings, more than anything, that will determine Sharetronic Data Technology's ability to maintain a healthy balance sheet going forward. 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. Sharetronic Data Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sharetronic Data Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sharetronic Data Technology has CN¥208.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 247% over the last year. So we are not troubled with Sharetronic Data Technology's debt use. 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. For instance, we've identified 1 warning sign for Sharetronic Data Technology that you should be aware of.

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.