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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Surfilter Network Technology Co., Ltd. (SZSE:300311) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Surfilter Network Technology Carry?

As you can see below, at the end of June 2024, Surfilter Network Technology had CN¥47.4m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥177.2m in cash offsetting this, leading to net cash of CN¥129.8m.

How Strong Is Surfilter Network Technology's Balance Sheet?

According to the last reported balance sheet, Surfilter Network Technology had liabilities of CN¥504.3m due within 12 months, and liabilities of CN¥83.0m due beyond 12 months. Offsetting this, it had CN¥177.2m in cash and CN¥270.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥139.5m more than its cash and near-term receivables, combined.

Given Surfilter Network Technology has a market capitalization of CN¥4.92b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Surfilter Network Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Surfilter Network Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Surfilter Network Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥518m. To be frank that doesn't bode well.

So How Risky Is Surfilter Network Technology?

While Surfilter Network Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥2.4m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Surfilter Network Technology .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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