Warren Buffett famously said, '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 Vanjee Technology Co., Ltd. (SZSE:300552) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Vanjee Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Vanjee Technology had CN¥161.8m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥462.0m in cash, so it actually has CN¥300.2m net cash.

How Strong Is Vanjee Technology's Balance Sheet?

The latest balance sheet data shows that Vanjee Technology had liabilities of CN¥903.9m due within a year, and liabilities of CN¥117.5m falling due after that. Offsetting these obligations, it had cash of CN¥462.0m as well as receivables valued at CN¥1.13b due within 12 months. So it actually has CN¥573.8m more liquid assets than total liabilities.

This surplus suggests that Vanjee Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vanjee 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 Vanjee Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Vanjee Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 9.6%, to CN¥965m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Vanjee Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Vanjee Technology 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¥233m and booked a CN¥408m accounting loss. But at least it has CN¥300.2m on the balance sheet to spend on growth, near-term. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Vanjee Technology you should know about.

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.