Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies CSSC Science& Technology Co., Ltd (SHSE:600072) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CSSC Science& Technology

What Is CSSC Science& Technology's Debt?

The image below, which you can click on for greater detail, shows that CSSC Science& Technology had debt of CN¥834.3m at the end of June 2022, a reduction from CN¥1.76b over a year. However, its balance sheet shows it holds CN¥1.49b in cash, so it actually has CN¥657.8m net cash.

A Look At CSSC Science& Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that CSSC Science& Technology had liabilities of CN¥2.97b due within 12 months and liabilities of CN¥322.7m due beyond that. Offsetting this, it had CN¥1.49b in cash and CN¥1.87b in receivables that were due within 12 months. So it actually has CN¥68.5m more liquid assets than total liabilities.

Having regard to CSSC Science& Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥9.71b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CSSC Science& Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that CSSC Science& Technology's load is not too heavy, because its EBIT was down 97% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CSSC Science& Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CSSC Science& Technology 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. Over the last three years, CSSC Science& Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CSSC Science& Technology has net cash of CN¥657.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥384m, being 1,896% of its EBIT. So we are not troubled with CSSC Science& Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for CSSC Science& Technology that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.