Warren Buffett famously said, '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 Hubei Zhongyi Technology Inc. (SZSE:301150) does have debt on its balance sheet. 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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hubei Zhongyi Technology's Debt?

As you can see below, at the end of September 2024, Hubei Zhongyi Technology had CN¥530.6m of debt, up from CN¥150.0m a year ago. Click the image for more detail. However, it does have CN¥2.04b in cash offsetting this, leading to net cash of CN¥1.51b.

How Strong Is Hubei Zhongyi Technology's Balance Sheet?

We can see from the most recent balance sheet that Hubei Zhongyi Technology had liabilities of CN¥2.34b falling due within a year, and liabilities of CN¥117.4m due beyond that. Offsetting this, it had CN¥2.04b in cash and CN¥1.98b in receivables that were due within 12 months. So it actually has CN¥1.57b more liquid assets than total liabilities.

This luscious liquidity implies that Hubei Zhongyi Technology's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hubei Zhongyi Technology has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hubei Zhongyi Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hubei Zhongyi Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to CN¥4.5b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hubei Zhongyi Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hubei Zhongyi Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥230m of cash and made a loss of CN¥40m. Given it only has net cash of CN¥1.51b, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Hubei Zhongyi Technology may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 1 warning sign for Hubei Zhongyi Technology 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.