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 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. We can see that New Trend International Logis-Tech Co.,Ltd. (SZSE:300532) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 examine debt levels, we first consider both cash and debt levels, together.

What Is New Trend International Logis-TechLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that New Trend International Logis-TechLtd had CN¥37.6m of debt in September 2023, down from CN¥60.0m, one year before. But it also has CN¥747.5m in cash to offset that, meaning it has CN¥709.9m net cash.

How Strong Is New Trend International Logis-TechLtd's Balance Sheet?

We can see from the most recent balance sheet that New Trend International Logis-TechLtd had liabilities of CN¥3.49b falling due within a year, and liabilities of CN¥72.6m due beyond that. On the other hand, it had cash of CN¥747.5m and CN¥2.14b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥674.7m.

Since publicly traded New Trend International Logis-TechLtd shares are worth a total of CN¥4.36b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, New Trend International Logis-TechLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, New Trend International Logis-TechLtd grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is New Trend International Logis-TechLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. New Trend International Logis-TechLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, New Trend International Logis-TechLtd's free cash flow amounted to 33% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although New Trend International Logis-TechLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥709.9m. And we liked the look of last year's 61% year-on-year EBIT growth. So we don't think New Trend International Logis-TechLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with New Trend International Logis-TechLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.