Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Shenzhen Liande Automation Equipment co.,ltd. (SZSE:300545) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Liande Automation Equipmentltd's Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen Liande Automation Equipmentltd had CN¥535.2m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥626.6m in cash, so it actually has CN¥91.4m net cash.

How Healthy Is Shenzhen Liande Automation Equipmentltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Liande Automation Equipmentltd had liabilities of CN¥1.03b due within 12 months and liabilities of CN¥230.7m due beyond that. On the other hand, it had cash of CN¥626.6m and CN¥683.2m worth of receivables due within a year. So it actually has CN¥53.4m more liquid assets than total liabilities.

This state of affairs indicates that Shenzhen Liande Automation Equipmentltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.39b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Shenzhen Liande Automation Equipmentltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shenzhen Liande Automation Equipmentltd grew its EBIT by 99% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Liande Automation Equipmentltd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Liande Automation Equipmentltd 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. In the last three years, Shenzhen Liande Automation Equipmentltd created free cash flow amounting to 8.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Liande Automation Equipmentltd has CN¥91.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 99% year-on-year EBIT growth. So we don't think Shenzhen Liande Automation Equipmentltd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Shenzhen Liande Automation Equipmentltd, you may well want to click here to check an interactive graph of its earnings per share history.

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.