David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shaanxi Lighte Optoelectronics Material Co.,Ltd (SHSE:688150) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shaanxi Lighte Optoelectronics MaterialLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shaanxi Lighte Optoelectronics MaterialLtd had debt of CN¥136.2m, up from CN¥100.7m in one year. But on the other hand it also has CN¥912.7m in cash, leading to a CN¥776.5m net cash position.

A Look At Shaanxi Lighte Optoelectronics MaterialLtd's Liabilities

The latest balance sheet data shows that Shaanxi Lighte Optoelectronics MaterialLtd had liabilities of CN¥103.8m due within a year, and liabilities of CN¥145.4m falling due after that. Offsetting these obligations, it had cash of CN¥912.7m as well as receivables valued at CN¥141.9m due within 12 months. So it can boast CN¥805.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Shaanxi Lighte Optoelectronics MaterialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shaanxi Lighte Optoelectronics MaterialLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Shaanxi Lighte Optoelectronics MaterialLtd grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shaanxi Lighte Optoelectronics MaterialLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. Shaanxi Lighte Optoelectronics MaterialLtd 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. Over the last three years, Shaanxi Lighte Optoelectronics MaterialLtd 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 it is always sensible to investigate a company's debt, in this case Shaanxi Lighte Optoelectronics MaterialLtd has CN¥776.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 33% over the last year. So we are not troubled with Shaanxi Lighte Optoelectronics MaterialLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shaanxi Lighte Optoelectronics MaterialLtd 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.

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.