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. As with many other companies Geovis Technology Co.,Ltd (SHSE:688568) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Geovis TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Geovis TechnologyLtd had CN¥882.1m of debt, an increase on CN¥321.5m, over one year. However, it does have CN¥1.02b in cash offsetting this, leading to net cash of CN¥140.3m.

How Healthy Is Geovis TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Geovis TechnologyLtd had liabilities of CN¥2.94b due within 12 months and liabilities of CN¥212.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.02b as well as receivables valued at CN¥3.25b due within 12 months. So it can boast CN¥1.12b more liquid assets than total liabilities.

This short term liquidity is a sign that Geovis TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Geovis TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Geovis TechnologyLtd has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Geovis TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Geovis TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Geovis TechnologyLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Geovis TechnologyLtd has net cash of CN¥140.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 41% over the last year. So we don't have any problem with Geovis TechnologyLtd's use of debt. 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. For example, we've discovered 2 warning signs for Geovis TechnologyLtd that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.