David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Jiangsu Olive Sensors High-Tech Co., Ltd. (SZSE:300507) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Olive Sensors High-Tech's Net Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu Olive Sensors High-Tech had CN¥362.3m in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥672.9m in cash, leading to a CN¥310.7m net cash position.

How Healthy Is Jiangsu Olive Sensors High-Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Olive Sensors High-Tech had liabilities of CN¥678.1m due within 12 months and liabilities of CN¥94.4m due beyond that. On the other hand, it had cash of CN¥672.9m and CN¥590.2m worth of receivables due within a year. So it can boast CN¥490.6m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Olive Sensors High-Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Olive Sensors High-Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiangsu Olive Sensors High-Tech grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Olive Sensors High-Tech'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Olive Sensors High-Tech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jiangsu Olive Sensors High-Tech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Olive Sensors High-Tech has net cash of CN¥310.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we are not troubled with Jiangsu Olive Sensors High-Tech's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Olive Sensors High-Tech you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.