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 can see that Shandong Yabo Technology Co., Ltd (SZSE:002323) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Shandong Yabo Technology

How Much Debt Does Shandong Yabo Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shandong Yabo Technology had CN¥60.1m of debt, an increase on none, over one year. However, it does have CN¥78.9m in cash offsetting this, leading to net cash of CN¥18.9m.

A Look At Shandong Yabo Technology's Liabilities

The latest balance sheet data shows that Shandong Yabo Technology had liabilities of CN¥568.7m due within a year, and liabilities of CN¥12.7m falling due after that. Offsetting this, it had CN¥78.9m in cash and CN¥802.5m in receivables that were due within 12 months. So it actually has CN¥300.0m more liquid assets than total liabilities.

This surplus suggests that Shandong Yabo Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shandong Yabo 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 it is Shandong Yabo Technology'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.

In the last year Shandong Yabo Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to CN¥664m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shandong Yabo Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Shandong Yabo Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥23m of cash and made a loss of CN¥30m. With only CN¥18.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Shandong Yabo Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.