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 Focuslight Technologies Inc (SHSE:688167) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Focuslight Technologies Carry?

As you can see below, at the end of September 2024, Focuslight Technologies had CN¥491.7m of debt, up from CN¥62.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥926.6m in cash, leading to a CN¥434.9m net cash position.

How Healthy Is Focuslight Technologies' Balance Sheet?

The latest balance sheet data shows that Focuslight Technologies had liabilities of CN¥230.8m due within a year, and liabilities of CN¥603.8m falling due after that. Offsetting this, it had CN¥926.6m in cash and CN¥240.4m in receivables that were due within 12 months. So it actually has CN¥332.5m more liquid assets than total liabilities.

This surplus suggests that Focuslight Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Focuslight Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Focuslight Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Focuslight Technologies reported revenue of CN¥635m, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Focuslight Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Focuslight Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥428m of cash and made a loss of CN¥4.2m. Given it only has net cash of CN¥434.9m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Focuslight Technologies is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.