Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SDIC Intelligence Xiamen Information's Debt?

You can click the graphic below for the historical numbers, but it shows that SDIC Intelligence Xiamen Information had CN¥179.5m of debt in September 2024, down from CN¥320.8m, one year before. But it also has CN¥950.7m in cash to offset that, meaning it has CN¥771.2m net cash.

How Strong Is SDIC Intelligence Xiamen Information's Balance Sheet?

The latest balance sheet data shows that SDIC Intelligence Xiamen Information had liabilities of CN¥1.22b due within a year, and liabilities of CN¥493.8m falling due after that. On the other hand, it had cash of CN¥950.7m and CN¥1.54b worth of receivables due within a year. So it actually has CN¥778.1m more liquid assets than total liabilities.

This surplus suggests that SDIC Intelligence Xiamen Information has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SDIC Intelligence Xiamen Information boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SDIC Intelligence Xiamen Information can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SDIC Intelligence Xiamen Information wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥2.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is SDIC Intelligence Xiamen Information?

Although SDIC Intelligence Xiamen Information had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥84m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 1 warning sign for SDIC Intelligence Xiamen Information you should be aware of.

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.