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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Shenzhen United Winners Laser Co., Ltd. (SHSE:688518) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Shenzhen United Winners Laser's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shenzhen United Winners Laser had CN¥692.2m of debt, an increase on CN¥198.0m, over one year. However, it does have CN¥1.15b in cash offsetting this, leading to net cash of CN¥461.5m.

How Strong Is Shenzhen United Winners Laser's Balance Sheet?

The latest balance sheet data shows that Shenzhen United Winners Laser had liabilities of CN¥3.84b due within a year, and liabilities of CN¥11.2m falling due after that. On the other hand, it had cash of CN¥1.15b and CN¥2.24b worth of receivables due within a year. So it has liabilities totalling CN¥450.5m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen United Winners Laser shares are worth a total of CN¥4.36b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Shenzhen United Winners Laser boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenzhen United Winners Laser's saving grace is its low debt levels, because its EBIT has tanked 74% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen United Winners Laser 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenzhen United Winners Laser 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 three years, Shenzhen United Winners Laser saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Shenzhen United Winners Laser's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥461.5m. So although we see some areas for improvement, we're not too worried about Shenzhen United Winners Laser's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 warning signs for Shenzhen United Winners Laser (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.