David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does EFORT Intelligent Equipment Carry?

The image below, which you can click on for greater detail, shows that at September 2023 EFORT Intelligent Equipment had debt of CN¥661.7m, up from CN¥626.5m in one year. However, because it has a cash reserve of CN¥564.5m, its net debt is less, at about CN¥97.2m.

A Look At EFORT Intelligent Equipment's Liabilities

According to the last reported balance sheet, EFORT Intelligent Equipment had liabilities of CN¥1.46b due within 12 months, and liabilities of CN¥332.1m due beyond 12 months. Offsetting this, it had CN¥564.5m in cash and CN¥1.41b in receivables that were due within 12 months. So it can boast CN¥180.7m more liquid assets than total liabilities.

This surplus suggests that EFORT Intelligent Equipment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since EFORT Intelligent Equipment will need earnings to service that debt. 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 EFORT Intelligent Equipment wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to CN¥1.9b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, EFORT Intelligent Equipment still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥67m at the EBIT level. 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. 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 EFORT Intelligent Equipment .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.