Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that SBT Ultrasonic Technology Co.,Ltd. (SHSE:688392) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SBT Ultrasonic TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 SBT Ultrasonic TechnologyLtd had debt of CN¥223.0m, up from CN¥210.3m in one year. But it also has CN¥1.29b in cash to offset that, meaning it has CN¥1.07b net cash.

How Healthy Is SBT Ultrasonic TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, SBT Ultrasonic TechnologyLtd had liabilities of CN¥333.3m due within 12 months, and liabilities of CN¥8.80m due beyond 12 months. Offsetting this, it had CN¥1.29b in cash and CN¥372.2m in receivables that were due within 12 months. So it can boast CN¥1.32b more liquid assets than total liabilities.

It's good to see that SBT Ultrasonic TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that SBT Ultrasonic TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 SBT Ultrasonic TechnologyLtd 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.

In the last year SBT Ultrasonic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥421m. That makes us nervous, to say the least.

So How Risky Is SBT Ultrasonic TechnologyLtd?

Although SBT Ultrasonic TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥9.0m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SBT Ultrasonic TechnologyLtd is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.