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 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. We note that Zhejiang MTCN Technology Co.,Ltd. (SZSE:003026) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Zhejiang MTCN TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhejiang MTCN TechnologyLtd had CN¥357.1m of debt, an increase on CN¥267.4m, over one year. However, it also had CN¥194.9m in cash, and so its net debt is CN¥162.2m.

How Strong Is Zhejiang MTCN TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang MTCN TechnologyLtd had liabilities of CN¥488.7m falling due within a year, and liabilities of CN¥195.4m due beyond that. Offsetting these obligations, it had cash of CN¥194.9m as well as receivables valued at CN¥193.3m due within 12 months. So its liabilities total CN¥295.9m more than the combination of its cash and short-term receivables.

Given Zhejiang MTCN TechnologyLtd has a market capitalization of CN¥3.86b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhejiang MTCN TechnologyLtd'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 Zhejiang MTCN TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥413m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Zhejiang MTCN TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥1.1m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥1.3m into a profit. So we do think this stock is quite risky. 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. We've identified 1 warning sign with Zhejiang MTCN TechnologyLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.