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. We note that Easy Click Worldwide Network Technology Co., Ltd. (SZSE:301171) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Easy Click Worldwide Network Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Easy Click Worldwide Network Technology had debt of CN¥556.4m, up from CN¥36.0m in one year. But on the other hand it also has CN¥2.91b in cash, leading to a CN¥2.35b net cash position.

A Look At Easy Click Worldwide Network Technology's Liabilities

According to the last reported balance sheet, Easy Click Worldwide Network Technology had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥88.3m due beyond 12 months. On the other hand, it had cash of CN¥2.91b and CN¥2.17b worth of receivables due within a year. So it can boast CN¥3.00b more liquid assets than total liabilities.

It's good to see that Easy Click Worldwide Network Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Easy Click Worldwide Network Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Easy Click Worldwide Network Technology grew its EBIT by 37% 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 future earnings, more than anything, that will determine Easy Click Worldwide Network Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Easy Click Worldwide Network Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Easy Click Worldwide Network Technology recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Easy Click Worldwide Network Technology has net cash of CN¥2.35b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 37% over the last year. So we don't think Easy Click Worldwide Network Technology's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Easy Click Worldwide Network Technology has 2 warning signs (and 1 which is significant) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.