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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shanghai Longcheer Technology Co., Ltd. (SHSE:603341) does use debt in its business. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Longcheer Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Longcheer Technology had CN¥1.71b of debt in June 2024, down from CN¥2.03b, one year before. However, its balance sheet shows it holds CN¥8.26b in cash, so it actually has CN¥6.54b net cash.

A Look At Shanghai Longcheer Technology's Liabilities

The latest balance sheet data shows that Shanghai Longcheer Technology had liabilities of CN¥18.8b due within a year, and liabilities of CN¥786.4m falling due after that. Offsetting these obligations, it had cash of CN¥8.26b as well as receivables valued at CN¥10.3b due within 12 months. So its liabilities total CN¥1.05b more than the combination of its cash and short-term receivables.

Of course, Shanghai Longcheer Technology has a market capitalization of CN¥18.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shanghai Longcheer Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Shanghai Longcheer Technology has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Longcheer Technology'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, a company can only pay off debt with cold hard cash, not accounting profits. While Shanghai Longcheer Technology 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, Shanghai Longcheer Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai Longcheer Technology has CN¥6.54b in net cash. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in CN¥957m. So we don't have any problem with Shanghai Longcheer Technology's use of debt. 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. For example, we've discovered 4 warning signs for Shanghai Longcheer Technology that you should be aware of before investing here.

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.