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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shenzhen Xinhao Photoelectricity Technology Co., Ltd (SZSE:301051) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Xinhao Photoelectricity Technology's Net Debt?

As you can see below, Shenzhen Xinhao Photoelectricity Technology had CN¥1.40b of debt at June 2024, down from CN¥1.50b a year prior. However, it does have CN¥1.36b in cash offsetting this, leading to net debt of about CN¥45.0m.

How Strong Is Shenzhen Xinhao Photoelectricity Technology's Balance Sheet?

According to the last reported balance sheet, Shenzhen Xinhao Photoelectricity Technology had liabilities of CN¥1.96b due within 12 months, and liabilities of CN¥397.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.36b as well as receivables valued at CN¥662.9m due within 12 months. So its liabilities total CN¥336.9m more than the combination of its cash and short-term receivables.

Of course, Shenzhen Xinhao Photoelectricity Technology has a market capitalization of CN¥5.14b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Shenzhen Xinhao Photoelectricity Technology has a very light debt load indeed. 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 Xinhao Photoelectricity Technology 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.

Over 12 months, Shenzhen Xinhao Photoelectricity Technology reported revenue of CN¥1.8b, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shenzhen Xinhao Photoelectricity Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥180m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥423m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Be aware that Shenzhen Xinhao Photoelectricity Technology is showing 1 warning sign in our investment analysis , 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.