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. As with many other companies Shenzhen Jame Technology Corp., Ltd. (SZSE:300868) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Jame Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shenzhen Jame Technology had debt of CN¥250.0m, up from CN¥206.7m in one year. However, its balance sheet shows it holds CN¥1.04b in cash, so it actually has CN¥786.6m net cash.

How Strong Is Shenzhen Jame Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Jame Technology had liabilities of CN¥481.6m due within a year, and liabilities of CN¥67.1m falling due after that. Offsetting this, it had CN¥1.04b in cash and CN¥164.8m in receivables that were due within 12 months. So it can boast CN¥652.5m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Jame Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shenzhen Jame 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 Shenzhen Jame 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 Shenzhen Jame Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to CN¥767m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shenzhen Jame Technology?

Although Shenzhen Jame Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥67m. 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. We think its revenue growth of 21% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Case in point: We've spotted 2 warning signs for Shenzhen Jame Technology you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.