Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Saurer Intelligent Technology Co. Ltd (SHSE:600545) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Saurer Intelligent Technology Carry?

As you can see below, Saurer Intelligent Technology had CN¥2.25b of debt at September 2024, down from CN¥2.36b a year prior. However, it also had CN¥435.0m in cash, and so its net debt is CN¥1.81b.

How Strong Is Saurer Intelligent Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Saurer Intelligent Technology had liabilities of CN¥4.31b due within 12 months and liabilities of CN¥986.0m due beyond that. Offsetting this, it had CN¥435.0m in cash and CN¥3.54b in receivables that were due within 12 months. So its liabilities total CN¥1.32b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Saurer Intelligent Technology has a market capitalization of CN¥5.11b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Saurer Intelligent 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.

In the last year Saurer Intelligent Technology had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥4.6b. That makes us nervous, to say the least.

Caveat Emptor

While Saurer Intelligent 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¥48m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥132m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Saurer Intelligent Technology has 2 warning signs we think you should be aware of.

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.