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 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 note that Motorcomm Electronic Technology Co., Ltd. (SHSE:688515) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Motorcomm Electronic Technology's Debt?

As you can see below, at the end of September 2024, Motorcomm Electronic Technology had CN¥11.2m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.37b in cash to offset that, meaning it has CN¥1.36b net cash.

How Healthy Is Motorcomm Electronic Technology's Balance Sheet?

We can see from the most recent balance sheet that Motorcomm Electronic Technology had liabilities of CN¥113.4m falling due within a year, and liabilities of CN¥9.46m due beyond that. On the other hand, it had cash of CN¥1.37b and CN¥77.7m worth of receivables due within a year. So it can boast CN¥1.32b more liquid assets than total liabilities.

This surplus suggests that Motorcomm Electronic Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Motorcomm Electronic Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Motorcomm Electronic 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.

In the last year Motorcomm Electronic Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥375m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Motorcomm Electronic Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Motorcomm Electronic Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥309m and booked a CN¥150m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.36b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Motorcomm Electronic Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Motorcomm Electronic Technology (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.