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 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. As with many other companies SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does SanFeng Intelligent Equipment Group Carry?

As you can see below, SanFeng Intelligent Equipment Group had CN¥179.5m of debt at March 2024, down from CN¥187.1m a year prior. However, its balance sheet shows it holds CN¥418.7m in cash, so it actually has CN¥239.2m net cash.

How Strong Is SanFeng Intelligent Equipment Group's Balance Sheet?

We can see from the most recent balance sheet that SanFeng Intelligent Equipment Group had liabilities of CN¥2.73b falling due within a year, and liabilities of CN¥24.8m due beyond that. On the other hand, it had cash of CN¥418.7m and CN¥664.3m worth of receivables due within a year. So it has liabilities totalling CN¥1.67b more than its cash and near-term receivables, combined.

SanFeng Intelligent Equipment Group has a market capitalization of CN¥5.27b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, SanFeng Intelligent Equipment Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that SanFeng Intelligent Equipment Group improved its EBIT from a last year's loss to a positive CN¥5.0m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SanFeng Intelligent Equipment Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SanFeng Intelligent Equipment Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, SanFeng Intelligent Equipment Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While SanFeng Intelligent Equipment Group does have more liabilities than liquid assets, it also has net cash of CN¥239.2m. The cherry on top was that in converted 3,938% of that EBIT to free cash flow, bringing in CN¥197m. So we don't have any problem with SanFeng Intelligent Equipment Group's use of debt. 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. Case in point: We've spotted 1 warning sign for SanFeng Intelligent Equipment Group you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.