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 ArcherMind Technology (Nanjing) Co., Ltd. (SZSE:300598) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is ArcherMind Technology (Nanjing)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that ArcherMind Technology (Nanjing) had CN¥301.1m of debt in September 2024, down from CN¥458.7m, one year before. But it also has CN¥572.1m in cash to offset that, meaning it has CN¥271.0m net cash.

How Healthy Is ArcherMind Technology (Nanjing)'s Balance Sheet?

The latest balance sheet data shows that ArcherMind Technology (Nanjing) had liabilities of CN¥684.9m due within a year, and liabilities of CN¥10.7m falling due after that. On the other hand, it had cash of CN¥572.1m and CN¥737.3m worth of receivables due within a year. So it can boast CN¥613.7m more liquid assets than total liabilities.

This surplus suggests that ArcherMind Technology (Nanjing) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ArcherMind Technology (Nanjing) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is ArcherMind Technology (Nanjing)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ArcherMind Technology (Nanjing) wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to CN¥1.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is ArcherMind Technology (Nanjing)?

While ArcherMind Technology (Nanjing) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥259m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for ArcherMind Technology (Nanjing) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.