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.' 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. As with many other companies Zhejiang Yongtai Technology Co.,Ltd. (SZSE:002326) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Zhejiang Yongtai TechnologyLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Zhejiang Yongtai TechnologyLtd had CN¥4.39b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥804.7m, its net debt is less, at about CN¥3.58b.

A Look At Zhejiang Yongtai TechnologyLtd's Liabilities

The latest balance sheet data shows that Zhejiang Yongtai TechnologyLtd had liabilities of CN¥6.39b due within a year, and liabilities of CN¥1.82b falling due after that. Offsetting these obligations, it had cash of CN¥804.7m as well as receivables valued at CN¥1.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.79b.

This is a mountain of leverage relative to its market capitalization of CN¥9.04b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang Yongtai TechnologyLtd'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.

Over 12 months, Zhejiang Yongtai TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.4b, which is a fall of 4.3%. That's not what we would hope to see.

Caveat Emptor

Importantly, Zhejiang Yongtai TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥565m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥848m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Zhejiang Yongtai TechnologyLtd you should be aware of.

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.