Warren Buffett famously said, '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. We can see that Ningbo Lian Technology Co.,Ltd (SZSE:300784) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ningbo Lian TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ningbo Lian TechnologyLtd had CN¥41.8m of debt in September 2024, down from CN¥107.8m, one year before. But on the other hand it also has CN¥338.6m in cash, leading to a CN¥296.8m net cash position.

How Strong Is Ningbo Lian TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Ningbo Lian TechnologyLtd had liabilities of CN¥202.9m falling due within a year, and liabilities of CN¥55.5m due beyond that. On the other hand, it had cash of CN¥338.6m and CN¥175.9m worth of receivables due within a year. So it can boast CN¥256.1m more liquid assets than total liabilities.

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

But the other side of the story is that Ningbo Lian TechnologyLtd saw its EBIT decline by 4.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ningbo Lian TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ningbo Lian TechnologyLtd 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, Ningbo Lian TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ningbo Lian TechnologyLtd has net cash of CN¥296.8m, as well as more liquid assets than liabilities. So we are not troubled with Ningbo Lian TechnologyLtd's debt use. 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. For example Ningbo Lian TechnologyLtd has 3 warning signs (and 1 which can't be ignored) we think 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.