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. We note that Netac Technology Co., Ltd. (SZSE:300042) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Netac Technology's Net Debt?

As you can see below, at the end of June 2024, Netac Technology had CN¥198.8m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥685.8m in cash to offset that, meaning it has CN¥487.0m net cash.

How Healthy Is Netac Technology's Balance Sheet?

According to the last reported balance sheet, Netac Technology had liabilities of CN¥206.7m due within 12 months, and liabilities of CN¥61.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥685.8m as well as receivables valued at CN¥86.9m due within 12 months. So it actually has CN¥504.4m more liquid assets than total liabilities.

This surplus suggests that Netac Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Netac Technology 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 it is future earnings, more than anything, that will determine Netac Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Netac Technology made a loss at the EBIT level, and saw its revenue drop to CN¥797m, which is a fall of 53%. That makes us nervous, to say the least.

So How Risky Is Netac Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Netac Technology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥95m and booked a CN¥54m accounting loss. Given it only has net cash of CN¥487.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Netac Technology is showing 1 warning sign in our investment analysis , you should know about...

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.