The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Fortior Technology (Shenzhen) Co., Ltd. (SHSE:688279) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Fortior Technology (Shenzhen)'s Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Fortior Technology (Shenzhen) had debt of CN¥22.9m, up from none in one year. But on the other hand it also has CN¥1.61b in cash, leading to a CN¥1.58b net cash position.

A Look At Fortior Technology (Shenzhen)'s Liabilities

We can see from the most recent balance sheet that Fortior Technology (Shenzhen) had liabilities of CN¥58.1m falling due within a year, and liabilities of CN¥9.22m due beyond that. Offsetting this, it had CN¥1.61b in cash and CN¥10.1m in receivables that were due within 12 months. So it actually has CN¥1.55b more liquid assets than total liabilities.

This surplus suggests that Fortior Technology (Shenzhen) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Fortior Technology (Shenzhen) has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Fortior Technology (Shenzhen) grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fortior Technology (Shenzhen)'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Fortior Technology (Shenzhen) 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. During the last three years, Fortior Technology (Shenzhen) produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Fortior Technology (Shenzhen) has CN¥1.58b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 65% over the last year. So is Fortior Technology (Shenzhen)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Fortior Technology (Shenzhen), you may well want to click here to check an interactive graph of its earnings per share history.

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.