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. Importantly, Zhe Jiang Dali Technology Co.,Ltd (SZSE:002214) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

How Much Debt Does Zhe Jiang Dali TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Zhe Jiang Dali TechnologyLtd had debt of CN¥324.0m, up from CN¥129.0m in one year. However, it does have CN¥265.5m in cash offsetting this, leading to net debt of about CN¥58.5m.

How Healthy Is Zhe Jiang Dali TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhe Jiang Dali TechnologyLtd had liabilities of CN¥318.2m falling due within a year, and liabilities of CN¥249.7m due beyond that. On the other hand, it had cash of CN¥265.5m and CN¥765.8m worth of receivables due within a year. So it can boast CN¥463.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhe Jiang Dali TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Zhe Jiang Dali TechnologyLtd has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhe Jiang Dali TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Zhe Jiang Dali TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥244m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Zhe Jiang Dali TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥324m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zhe Jiang Dali TechnologyLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.