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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Allwinnertech Technology Co.,Ltd. (SZSE:300458) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Allwinnertech TechnologyLtd's Debt?

As you can see below, at the end of March 2024, Allwinnertech TechnologyLtd had CN¥270.8m of debt, up from CN¥150.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.98b in cash, leading to a CN¥1.71b net cash position.

How Healthy Is Allwinnertech TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Allwinnertech TechnologyLtd had liabilities of CN¥558.4m falling due within a year, and liabilities of CN¥60.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.98b as well as receivables valued at CN¥47.2m due within 12 months. So it actually has CN¥1.41b more liquid assets than total liabilities.

This surplus suggests that Allwinnertech TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Allwinnertech TechnologyLtd 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 Allwinnertech 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, Allwinnertech TechnologyLtd reported revenue of CN¥1.8b, which is a gain of 38%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Allwinnertech TechnologyLtd?

Although Allwinnertech TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥114m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 38% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Allwinnertech TechnologyLtd , and understanding them should be part of your investment process.

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.

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