The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Imeik Technology Development Co.,Ltd. (SZSE:300896) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Imeik Technology DevelopmentLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Imeik Technology DevelopmentLtd had debt of CN¥19.8m, up from none in one year. However, it does have CN¥3.87b in cash offsetting this, leading to net cash of CN¥3.85b.

How Strong Is Imeik Technology DevelopmentLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Imeik Technology DevelopmentLtd had liabilities of CN¥282.8m due within 12 months and liabilities of CN¥61.2m due beyond that. Offsetting this, it had CN¥3.87b in cash and CN¥198.6m in receivables that were due within 12 months. So it can boast CN¥3.72b more liquid assets than total liabilities.

This surplus suggests that Imeik Technology DevelopmentLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Imeik Technology DevelopmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Imeik Technology DevelopmentLtd grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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 Imeik Technology DevelopmentLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Imeik Technology DevelopmentLtd 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, Imeik Technology DevelopmentLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Imeik Technology DevelopmentLtd has net cash of CN¥3.85b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥1.9b. So we don't think Imeik Technology DevelopmentLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Imeik Technology DevelopmentLtd you should be aware of.

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.