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 Shenzhen Refond Optoelectronics Co.,Ltd. (SZSE:300241) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shenzhen Refond OptoelectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Refond OptoelectronicsLtd had CN¥351.4m of debt in June 2024, down from CN¥534.0m, one year before. However, it also had CN¥232.0m in cash, and so its net debt is CN¥119.4m.

How Healthy Is Shenzhen Refond OptoelectronicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Refond OptoelectronicsLtd had liabilities of CN¥1.05b due within 12 months and liabilities of CN¥125.8m due beyond that. Offsetting these obligations, it had cash of CN¥232.0m as well as receivables valued at CN¥682.9m due within 12 months. So it has liabilities totalling CN¥264.6m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Refond OptoelectronicsLtd shares are worth a total of CN¥4.15b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Refond OptoelectronicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Refond OptoelectronicsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 2.9%, to CN¥1.4b. 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 Refond OptoelectronicsLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥10m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥12m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Shenzhen Refond OptoelectronicsLtd you should be aware of.

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.