Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Tianjin Keyvia Electric Co.,Ltd (SZSE:300407) 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. If things get really bad, the lenders can take control of the business. 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 Tianjin Keyvia ElectricLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Tianjin Keyvia ElectricLtd had CN¥124.2m of debt in June 2024, down from CN¥259.0m, one year before. However, it does have CN¥650.3m in cash offsetting this, leading to net cash of CN¥526.2m.

A Look At Tianjin Keyvia ElectricLtd's Liabilities

We can see from the most recent balance sheet that Tianjin Keyvia ElectricLtd had liabilities of CN¥1.06b falling due within a year, and liabilities of CN¥163.8m due beyond that. On the other hand, it had cash of CN¥650.3m and CN¥974.8m worth of receivables due within a year. So it actually has CN¥397.9m more liquid assets than total liabilities.

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

The modesty of its debt load may become crucial for Tianjin Keyvia ElectricLtd if management cannot prevent a repeat of the 37% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin Keyvia ElectricLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tianjin Keyvia ElectricLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tianjin Keyvia ElectricLtd recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Keyvia ElectricLtd has net cash of CN¥526.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥125m, being 88% of its EBIT. So we don't have any problem with Tianjin Keyvia ElectricLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Tianjin Keyvia ElectricLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

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.