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 SDIC Intelligence Xiamen Information Co., Ltd. (SZSE:300188) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does SDIC Intelligence Xiamen Information Carry?

As you can see below, SDIC Intelligence Xiamen Information had CN¥150.5m of debt at March 2024, down from CN¥356.7m a year prior. But on the other hand it also has CN¥958.9m in cash, leading to a CN¥808.4m net cash position.

How Healthy Is SDIC Intelligence Xiamen Information's Balance Sheet?

We can see from the most recent balance sheet that SDIC Intelligence Xiamen Information had liabilities of CN¥1.21b falling due within a year, and liabilities of CN¥243.6m due beyond that. Offsetting this, it had CN¥958.9m in cash and CN¥1.55b in receivables that were due within 12 months. So it actually has CN¥1.06b more liquid assets than total liabilities.

This surplus suggests that SDIC Intelligence Xiamen Information has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SDIC Intelligence Xiamen Information boasts net cash, so it's fair to say it does not have a heavy debt load! 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 SDIC Intelligence Xiamen Information can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SDIC Intelligence Xiamen Information had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to CN¥2.0b. We would much prefer see growth.

So How Risky Is SDIC Intelligence Xiamen Information?

While SDIC Intelligence Xiamen Information lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥67m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 1 warning sign for SDIC Intelligence Xiamen Information that you should be aware of.

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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