Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Foshan NationStar Optoelectronics Co.,Ltd (SZSE:002449) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Foshan NationStar OptoelectronicsLtd

What Is Foshan NationStar OptoelectronicsLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Foshan NationStar OptoelectronicsLtd had debt of CN¥546.5m, up from CN¥244.4m in one year. However, its balance sheet shows it holds CN¥1.57b in cash, so it actually has CN¥1.02b net cash.

A Look At Foshan NationStar OptoelectronicsLtd's Liabilities

The latest balance sheet data shows that Foshan NationStar OptoelectronicsLtd had liabilities of CN¥2.03b due within a year, and liabilities of CN¥651.0m falling due after that. Offsetting these obligations, it had cash of CN¥1.57b as well as receivables valued at CN¥1.41b due within 12 months. So it actually has CN¥295.0m more liquid assets than total liabilities.

This surplus suggests that Foshan NationStar OptoelectronicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Foshan NationStar OptoelectronicsLtd 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 Foshan NationStar OptoelectronicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Foshan NationStar OptoelectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 6.9%, to CN¥3.6b. We would much prefer see growth.

So How Risky Is Foshan NationStar OptoelectronicsLtd?

While Foshan NationStar OptoelectronicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥79m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 learn about the 4 warning signs we've spotted with Foshan NationStar OptoelectronicsLtd (including 1 which shouldn't be ignored) .

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.

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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.