Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Guangzhou Risong Intelligent Technology Holding Co., Ltd. (SHSE:688090) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Guangzhou Risong Intelligent Technology Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Guangzhou Risong Intelligent Technology Holding had CN¥156.3m of debt, an increase on CN¥129.0m, over one year. But on the other hand it also has CN¥345.5m in cash, leading to a CN¥189.1m net cash position.

How Strong Is Guangzhou Risong Intelligent Technology Holding's Balance Sheet?

The latest balance sheet data shows that Guangzhou Risong Intelligent Technology Holding had liabilities of CN¥593.8m due within a year, and liabilities of CN¥63.3m falling due after that. On the other hand, it had cash of CN¥345.5m and CN¥522.5m worth of receivables due within a year. So it can boast CN¥210.8m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Risong Intelligent Technology Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangzhou Risong Intelligent Technology Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Guangzhou Risong Intelligent Technology Holding turned things around in the last 12 months, delivering and EBIT of CN¥27m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangzhou Risong Intelligent Technology Holding'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangzhou Risong Intelligent Technology Holding 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. Happily for any shareholders, Guangzhou Risong Intelligent Technology Holding actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangzhou Risong Intelligent Technology Holding has net cash of CN¥189.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥39m, being 144% of its EBIT. So we don't think Guangzhou Risong Intelligent Technology Holding's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Guangzhou Risong Intelligent Technology Holding has 3 warning signs (and 2 which are a bit unpleasant) we think 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.