The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Shenzhen TVT Digital Technology Co., Ltd. (SZSE:002835) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen TVT Digital Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen TVT Digital Technology had CN¥11.0m of debt in September 2024, down from CN¥50.0m, one year before. But on the other hand it also has CN¥592.0m in cash, leading to a CN¥581.0m net cash position.

A Look At Shenzhen TVT Digital Technology's Liabilities

We can see from the most recent balance sheet that Shenzhen TVT Digital Technology had liabilities of CN¥288.9m falling due within a year, and liabilities of CN¥4.84m due beyond that. Offsetting this, it had CN¥592.0m in cash and CN¥279.2m in receivables that were due within 12 months. So it actually has CN¥577.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen TVT Digital Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen TVT Digital Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen TVT Digital Technology has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen TVT Digital Technology will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. Shenzhen TVT Digital Technology 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. Happily for any shareholders, Shenzhen TVT Digital Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen TVT Digital Technology has CN¥581.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥207m, being 143% of its EBIT. So is Shenzhen TVT Digital Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 1 warning sign for Shenzhen TVT Digital Technology you should know about.

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.