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.' 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 Appotronics Corporation Limited (SHSE:688007) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Appotronics Carry?

The image below, which you can click on for greater detail, shows that Appotronics had debt of CN¥679.0m at the end of June 2024, a reduction from CN¥808.0m over a year. However, it does have CN¥1.84b in cash offsetting this, leading to net cash of CN¥1.16b.

How Healthy Is Appotronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Appotronics had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥392.9m due beyond that. On the other hand, it had cash of CN¥1.84b and CN¥475.5m worth of receivables due within a year. So it actually has CN¥744.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Appotronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Appotronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Appotronics grew its EBIT by 427% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Appotronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Appotronics 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, Appotronics saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Appotronics has CN¥1.16b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 427% over the last year. So we don't have any problem with Appotronics's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Appotronics .

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.