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 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 Goody Science and Technology Co., Ltd. (SZSE:002694) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

What Is Goody Science and Technology's Debt?

As you can see below, Goody Science and Technology had CN¥29.3m of debt at September 2024, down from CN¥202.3m a year prior. But it also has CN¥170.4m in cash to offset that, meaning it has CN¥141.1m net cash.

How Healthy Is Goody Science and Technology's Balance Sheet?

According to the last reported balance sheet, Goody Science and Technology had liabilities of CN¥613.8m due within 12 months, and liabilities of CN¥42.2m due beyond 12 months. Offsetting this, it had CN¥170.4m in cash and CN¥158.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥327.5m more than its cash and near-term receivables, combined.

Since publicly traded Goody Science and Technology shares are worth a total of CN¥4.34b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Goody Science and Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Goody Science and Technology will need earnings to service that debt. 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, Goody Science and Technology made a loss at the EBIT level, and saw its revenue drop to CN¥851m, which is a fall of 6.8%. That's not what we would hope to see.

So How Risky Is Goody Science and Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Goody Science and Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥226m and booked a CN¥105m accounting loss. With only CN¥141.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Goody Science and Technology you should be aware of, and 1 of them shouldn't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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