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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yonyou Network Technology Co.,Ltd. (SHSE:600588) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Yonyou Network TechnologyLtd

What Is Yonyou Network TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Yonyou Network TechnologyLtd had debt of CN¥6.47b, up from CN¥4.55b in one year. However, its balance sheet shows it holds CN¥7.60b in cash, so it actually has CN¥1.14b net cash.

A Look At Yonyou Network TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Yonyou Network TechnologyLtd had liabilities of CN¥9.72b due within 12 months and liabilities of CN¥2.74b due beyond that. Offsetting these obligations, it had cash of CN¥7.60b as well as receivables valued at CN¥3.61b due within 12 months. So it has liabilities totalling CN¥1.26b more than its cash and near-term receivables, combined.

Given Yonyou Network TechnologyLtd has a market capitalization of CN¥43.3b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yonyou Network TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yonyou Network TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Yonyou Network TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥9.4b, which is a fall of 2.3%. We would much prefer see growth.

So How Risky Is Yonyou Network TechnologyLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Yonyou Network TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.0b of cash and made a loss of CN¥272m. With only CN¥1.14b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Yonyou Network TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.