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. Importantly, NavInfo Co., Ltd. (SZSE:002405) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does NavInfo Carry?

The image below, which you can click on for greater detail, shows that at March 2024 NavInfo had debt of CN¥407.8m, up from CN¥132.7m in one year. But on the other hand it also has CN¥3.09b in cash, leading to a CN¥2.68b net cash position.

How Healthy Is NavInfo's Balance Sheet?

According to the last reported balance sheet, NavInfo had liabilities of CN¥2.01b due within 12 months, and liabilities of CN¥219.0m due beyond 12 months. On the other hand, it had cash of CN¥3.09b and CN¥1.15b worth of receivables due within a year. So it actually has CN¥2.00b more liquid assets than total liabilities.

This short term liquidity is a sign that NavInfo could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NavInfo has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NavInfo 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, NavInfo made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 9.0%. We would much prefer see growth.

So How Risky Is NavInfo?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that NavInfo had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥578m of cash and made a loss of CN¥1.4b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.68b. That means it could keep spending at its current rate for more than two years. 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 NavInfo 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.

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.