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 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. As with many other companies Shenzhen Intellifusion Technologies Co., Ltd. (SHSE:688343) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenzhen Intellifusion Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Intellifusion Technologies had CN¥50.0m of debt, an increase on none, over one year. But on the other hand it also has CN¥3.06b in cash, leading to a CN¥3.01b net cash position.

A Look At Shenzhen Intellifusion Technologies' Liabilities

According to the last reported balance sheet, Shenzhen Intellifusion Technologies had liabilities of CN¥525.1m due within 12 months, and liabilities of CN¥50.1m due beyond 12 months. On the other hand, it had cash of CN¥3.06b and CN¥541.7m worth of receivables due within a year. So it actually has CN¥3.02b more liquid assets than total liabilities.

This surplus liquidity suggests that Shenzhen Intellifusion Technologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shenzhen Intellifusion Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Shenzhen Intellifusion Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Intellifusion Technologies's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Shenzhen Intellifusion Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Shenzhen Intellifusion Technologies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.3b and booked a CN¥431m accounting loss. But at least it has CN¥3.01b on the balance sheet to spend on growth, near-term. 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. 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. We've identified 2 warning signs with Shenzhen Intellifusion Technologies (at least 1 which is significant) , and understanding them should be part of your investment process.

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