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.' 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. We note that BlueFocus Intelligent Communications Group Co., Ltd. (SZSE:300058) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is BlueFocus Intelligent Communications Group's Net Debt?

As you can see below, at the end of March 2024, BlueFocus Intelligent Communications Group had CN¥2.40b of debt, up from CN¥2.27b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥4.05b in cash, so it actually has CN¥1.64b net cash.

How Healthy Is BlueFocus Intelligent Communications Group's Balance Sheet?

According to the last reported balance sheet, BlueFocus Intelligent Communications Group had liabilities of CN¥12.5b due within 12 months, and liabilities of CN¥1.11b due beyond 12 months. Offsetting this, it had CN¥4.05b in cash and CN¥11.3b in receivables that were due within 12 months. So it can boast CN¥1.68b more liquid assets than total liabilities.

This surplus suggests that BlueFocus Intelligent Communications Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BlueFocus Intelligent Communications Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BlueFocus Intelligent Communications Group 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.

In the last year BlueFocus Intelligent Communications Group wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to CN¥59b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is BlueFocus Intelligent Communications Group?

Although BlueFocus Intelligent Communications Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥50m. 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. Keeping in mind its 52% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like BlueFocus Intelligent Communications Group 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com