Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that EmbedWay Technologies (Shanghai) Corporation (SHSE:603496) 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does EmbedWay Technologies (Shanghai) Carry?

The image below, which you can click on for greater detail, shows that at March 2024 EmbedWay Technologies (Shanghai) had debt of CN¥247.1m, up from CN¥214.4m in one year. But it also has CN¥467.3m in cash to offset that, meaning it has CN¥220.3m net cash.

How Healthy Is EmbedWay Technologies (Shanghai)'s Balance Sheet?

The latest balance sheet data shows that EmbedWay Technologies (Shanghai) had liabilities of CN¥946.4m due within a year, and liabilities of CN¥26.5m falling due after that. Offsetting this, it had CN¥467.3m in cash and CN¥410.8m in receivables that were due within 12 months. So its liabilities total CN¥94.8m more than the combination of its cash and short-term receivables.

Having regard to EmbedWay Technologies (Shanghai)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥8.84b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, EmbedWay Technologies (Shanghai) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, EmbedWay Technologies (Shanghai) grew its EBIT by 204% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 EmbedWay Technologies (Shanghai)'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. While EmbedWay Technologies (Shanghai) 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, EmbedWay Technologies (Shanghai) reported free cash flow worth 15% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that EmbedWay Technologies (Shanghai) has CN¥220.3m in net cash. And we liked the look of last year's 204% year-on-year EBIT growth. So is EmbedWay Technologies (Shanghai)'s debt a risk? It doesn't seem so to us. 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 2 warning signs with EmbedWay Technologies (Shanghai) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.