The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shanghai Golden Bridge InfoTech Co.,Ltd (SHSE:603918) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

How Much Debt Does Shanghai Golden Bridge InfoTechLtd Carry?

As you can see below, at the end of September 2024, Shanghai Golden Bridge InfoTechLtd had CN¥20.6m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥615.6m in cash to offset that, meaning it has CN¥595.0m net cash.

How Strong Is Shanghai Golden Bridge InfoTechLtd's Balance Sheet?

According to the last reported balance sheet, Shanghai Golden Bridge InfoTechLtd had liabilities of CN¥584.8m due within 12 months, and liabilities of CN¥4.80m due beyond 12 months. On the other hand, it had cash of CN¥615.6m and CN¥380.8m worth of receivables due within a year. So it actually has CN¥406.8m more liquid assets than total liabilities.

This surplus suggests that Shanghai Golden Bridge InfoTechLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Golden Bridge InfoTechLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Golden Bridge InfoTechLtd'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.

Over 12 months, Shanghai Golden Bridge InfoTechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥688m, which is a fall of 30%. That makes us nervous, to say the least.

So How Risky Is Shanghai Golden Bridge InfoTechLtd?

While Shanghai Golden Bridge InfoTechLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥31m. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shanghai Golden Bridge InfoTechLtd you should know about.

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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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.