Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chongqing Millison Technologies INC. (SZSE:301307) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Chongqing Millison Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Chongqing Millison Technologies had CN¥1.64b of debt, an increase on CN¥693.4m, over one year. However, it also had CN¥563.9m in cash, and so its net debt is CN¥1.08b.

How Strong Is Chongqing Millison Technologies' Balance Sheet?

According to the last reported balance sheet, Chongqing Millison Technologies had liabilities of CN¥2.44b due within 12 months, and liabilities of CN¥951.3m due beyond 12 months. Offsetting this, it had CN¥563.9m in cash and CN¥1.19b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.64b.

This deficit isn't so bad because Chongqing Millison Technologies is worth CN¥4.73b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Chongqing Millison Technologies 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.

In the last year Chongqing Millison Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to CN¥3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Chongqing Millison Technologies had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥60m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥704m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 1 warning sign for Chongqing Millison Technologies that 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.