David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Xgimi Technology Co.,Ltd. (SHSE:688696) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

What Is Xgimi TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Xgimi TechnologyLtd had debt of CN¥559.9m at the end of September 2024, a reduction from CN¥627.5m over a year. However, its balance sheet shows it holds CN¥2.52b in cash, so it actually has CN¥1.96b net cash.

A Look At Xgimi TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Xgimi TechnologyLtd had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥1.12b due beyond that. Offsetting this, it had CN¥2.52b in cash and CN¥233.7m in receivables that were due within 12 months. So it actually has CN¥451.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Xgimi TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xgimi TechnologyLtd 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 it is future earnings, more than anything, that will determine Xgimi TechnologyLtd'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.

In the last year Xgimi TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to CN¥3.4b. That's not what we would hope to see.

So How Risky Is Xgimi TechnologyLtd?

Although Xgimi TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥342m. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Xgimi TechnologyLtd .

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.