Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Yijiahe Technology Co., Ltd. (SHSE:603666) does carry debt. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yijiahe Technology

How Much Debt Does Yijiahe Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Yijiahe Technology had CN¥691.1m of debt, an increase on CN¥655.3m, over one year. However, because it has a cash reserve of CN¥615.3m, its net debt is less, at about CN¥75.8m.

How Strong Is Yijiahe Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yijiahe Technology had liabilities of CN¥1.07b due within 12 months and liabilities of CN¥213.2m due beyond that. On the other hand, it had cash of CN¥615.3m and CN¥986.7m worth of receivables due within a year. So it can boast CN¥316.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Yijiahe Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Yijiahe Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yijiahe Technology's ability to maintain a healthy balance sheet going forward. 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 Yijiahe Technology had a loss before interest and tax, and actually shrunk its revenue by 61%, to CN¥461m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Yijiahe Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥209m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 1 warning sign we've spotted with Yijiahe Technology .

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.