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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Shanghai Guao Electronic Technology Co., Ltd. (SZSE:300551) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Shanghai Guao Electronic Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Guao Electronic Technology had debt of CN¥21.6m, up from none in one year. However, its balance sheet shows it holds CN¥178.4m in cash, so it actually has CN¥156.8m net cash.

A Look At Shanghai Guao Electronic Technology's Liabilities

We can see from the most recent balance sheet that Shanghai Guao Electronic Technology had liabilities of CN¥258.8m falling due within a year, and liabilities of CN¥93.4m due beyond that. Offsetting this, it had CN¥178.4m in cash and CN¥174.1m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Shanghai Guao Electronic Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.83b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shanghai Guao Electronic Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Guao Electronic Technology'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 Shanghai Guao Electronic Technology had a loss before interest and tax, and actually shrunk its revenue by 43%, to CN¥352m. That makes us nervous, to say the least.

So How Risky Is Shanghai Guao Electronic Technology?

While Shanghai Guao Electronic Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥45m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs for Shanghai Guao Electronic 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.