Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Shenzhen Bluetrum Technology Co., Ltd. (SHSE:688332) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Bluetrum Technology's Net Debt?

As you can see below, at the end of June 2024, Shenzhen Bluetrum Technology had CN¥799.5m of debt, up from CN¥240.4m a year ago. Click the image for more detail. But it also has CN¥3.64b in cash to offset that, meaning it has CN¥2.84b net cash.

How Healthy Is Shenzhen Bluetrum Technology's Balance Sheet?

According to the last reported balance sheet, Shenzhen Bluetrum Technology had liabilities of CN¥1.01b due within 12 months, and liabilities of CN¥3.13m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.64b as well as receivables valued at CN¥62.2m due within 12 months. So it can boast CN¥2.69b more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenzhen Bluetrum Technology's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shenzhen Bluetrum Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shenzhen Bluetrum Technology has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shenzhen Bluetrum 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. Shenzhen Bluetrum 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. In the last three years, Shenzhen Bluetrum Technology's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Bluetrum Technology has net cash of CN¥2.84b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 84% over the last year. So is Shenzhen Bluetrum Technology's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 2 warning signs we've spotted with Shenzhen Bluetrum Technology (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.