Warren Buffett famously said, '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. Importantly, Dongguan Chitwing Technology Co., Ltd. (SZSE:002855) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

How Much Debt Does Dongguan Chitwing Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Dongguan Chitwing Technology had debt of CN¥435.4m, up from CN¥368.9m in one year. However, because it has a cash reserve of CN¥93.1m, its net debt is less, at about CN¥342.3m.

How Strong Is Dongguan Chitwing Technology's Balance Sheet?

We can see from the most recent balance sheet that Dongguan Chitwing Technology had liabilities of CN¥983.2m falling due within a year, and liabilities of CN¥277.4m due beyond that. Offsetting these obligations, it had cash of CN¥93.1m as well as receivables valued at CN¥390.7m due within 12 months. So its liabilities total CN¥776.8m more than the combination of its cash and short-term receivables.

Since publicly traded Dongguan Chitwing Technology shares are worth a total of CN¥6.99b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Dongguan Chitwing Technology'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, Dongguan Chitwing Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

While Dongguan Chitwing Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥199m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥98m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for Dongguan Chitwing Technology you should be aware of, and 2 of them shouldn't be ignored.

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.