Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Sunfly Intelligent Technology Co., LTD (SZSE:300423) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Sunfly Intelligent Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Sunfly Intelligent Technology had debt of CN¥171.6m, up from CN¥105.6m in one year. But it also has CN¥352.3m in cash to offset that, meaning it has CN¥180.7m net cash.

A Look At Sunfly Intelligent Technology's Liabilities

We can see from the most recent balance sheet that Sunfly Intelligent Technology had liabilities of CN¥1.86b falling due within a year, and liabilities of CN¥28.9m due beyond that. On the other hand, it had cash of CN¥352.3m and CN¥1.29b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥245.3m.

Since publicly traded Sunfly Intelligent Technology shares are worth a total of CN¥4.67b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sunfly Intelligent Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sunfly Intelligent Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sunfly Intelligent Technology had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥1.3b. To be frank that doesn't bode well.

So How Risky Is Sunfly Intelligent Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sunfly Intelligent Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥121m of cash and made a loss of CN¥1.2b. But the saving grace is the CN¥180.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 2 warning signs we've spotted with Sunfly Intelligent Technology (including 1 which is concerning) .

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.