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 can see that Shenzhen Sinovatio Technology Co., Ltd. (SZSE:002912) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Sinovatio Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shenzhen Sinovatio Technology had CN¥11.0m of debt, an increase on CN¥4.31m, over one year. But on the other hand it also has CN¥1.08b in cash, leading to a CN¥1.07b net cash position.

How Strong Is Shenzhen Sinovatio Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Sinovatio Technology had liabilities of CN¥440.2m due within 12 months and liabilities of CN¥41.4m due beyond that. Offsetting this, it had CN¥1.08b in cash and CN¥234.6m in receivables that were due within 12 months. So it actually has CN¥837.7m more liquid assets than total liabilities.

It's good to see that Shenzhen Sinovatio Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shenzhen Sinovatio 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 future earnings, more than anything, that will determine Shenzhen Sinovatio Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Sinovatio Technology had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥510m. That's not what we would hope to see.

So How Risky Is Shenzhen Sinovatio Technology?

Although Shenzhen Sinovatio Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥301m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Sinovatio Technology .

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.