Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Foshan Yowant Technology Co.,Ltd (SZSE:002291) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Foshan Yowant TechnologyLtd's Debt?

As you can see below, at the end of December 2023, Foshan Yowant TechnologyLtd had CN¥939.5m of debt, up from CN¥753.5m a year ago. Click the image for more detail. However, it also had CN¥804.5m in cash, and so its net debt is CN¥135.0m.

A Look At Foshan Yowant TechnologyLtd's Liabilities

According to the last reported balance sheet, Foshan Yowant TechnologyLtd had liabilities of CN¥1.78b due within 12 months, and liabilities of CN¥577.8m due beyond 12 months. Offsetting this, it had CN¥804.5m in cash and CN¥1.24b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥309.5m.

Since publicly traded Foshan Yowant TechnologyLtd shares are worth a total of CN¥5.42b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foshan Yowant TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Foshan Yowant TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥4.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Foshan Yowant TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥643m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥512m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Foshan Yowant TechnologyLtd you should know about.

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.