Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Cosonic Intelligent Technologies Co., Ltd. (SZSE:300793) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Cosonic Intelligent Technologies's Net Debt?

As you can see below, at the end of March 2024, Cosonic Intelligent Technologies had CN¥1.13b of debt, up from CN¥398.4m a year ago. Click the image for more detail. However, it does have CN¥1.91b in cash offsetting this, leading to net cash of CN¥786.9m.

A Look At Cosonic Intelligent Technologies' Liabilities

We can see from the most recent balance sheet that Cosonic Intelligent Technologies had liabilities of CN¥782.8m falling due within a year, and liabilities of CN¥966.9m due beyond that. Offsetting this, it had CN¥1.91b in cash and CN¥451.7m in receivables that were due within 12 months. So it can boast CN¥615.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Cosonic Intelligent Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cosonic Intelligent Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Cosonic Intelligent Technologies grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cosonic Intelligent Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Cosonic Intelligent Technologies 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, Cosonic Intelligent Technologies saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cosonic Intelligent Technologies has net cash of CN¥786.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with Cosonic Intelligent Technologies's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cosonic Intelligent Technologies is showing 3 warning signs in our investment analysis , you should know about...

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.

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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.