Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that NavInfo Co., Ltd. (SZSE:002405) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

What Is NavInfo's Net Debt?

As you can see below, at the end of September 2024, NavInfo had CN¥356.0m of debt, up from CN¥218.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.73b in cash, so it actually has CN¥2.37b net cash.

How Strong Is NavInfo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NavInfo had liabilities of CN¥2.09b due within 12 months and liabilities of CN¥250.4m due beyond that. Offsetting this, it had CN¥2.73b in cash and CN¥1.20b in receivables that were due within 12 months. So it can boast CN¥1.58b more liquid assets than total liabilities.

This short term liquidity is a sign that NavInfo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, NavInfo boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NavInfo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, NavInfo made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 7.1%. We would much prefer see growth.

So How Risky Is NavInfo?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months NavInfo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥610m and booked a CN¥1.3b accounting loss. But the saving grace is the CN¥2.37b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. For example - NavInfo has 1 warning sign we think you should be aware of.

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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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.