Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Vanjee Technology Co., Ltd. (SZSE:300552) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Vanjee Technology

What Is Vanjee Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Vanjee Technology had debt of CN¥14.2m, up from none in one year. However, its balance sheet shows it holds CN¥902.3m in cash, so it actually has CN¥888.1m net cash.

How Strong Is Vanjee Technology's Balance Sheet?

The latest balance sheet data shows that Vanjee Technology had liabilities of CN¥460.0m due within a year, and liabilities of CN¥55.3m falling due after that. Offsetting this, it had CN¥902.3m in cash and CN¥1.14b in receivables that were due within 12 months. So it actually has CN¥1.53b more liquid assets than total liabilities.

It's good to see that Vanjee Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Vanjee Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Vanjee Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Vanjee Technology made a loss at the EBIT level, and saw its revenue drop to CN¥954m, which is a fall of 43%. To be frank that doesn't bode well.

So How Risky Is Vanjee Technology?

While Vanjee Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥25m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 4 warning signs with Vanjee Technology (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.