Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Yusys Technologies Co., Ltd. (SZSE:300674) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Yusys Technologies Carry?

As you can see below, at the end of September 2023, Yusys Technologies had CN¥565.6m of debt, up from CN¥295.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.15b in cash, so it actually has CN¥583.5m net cash.

How Healthy Is Yusys Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yusys Technologies had liabilities of CN¥1.93b due within 12 months and liabilities of CN¥11.9m due beyond that. Offsetting this, it had CN¥1.15b in cash and CN¥1.87b in receivables that were due within 12 months. So it actually has CN¥1.08b more liquid assets than total liabilities.

This surplus suggests that Yusys Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yusys Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Yusys Technologies grew its EBIT by 44% 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 Yusys Technologies'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. Yusys Technologies 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. Considering the last three years, Yusys Technologies actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yusys Technologies has CN¥583.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 44% year-on-year EBIT growth. So we don't think Yusys Technologies's use of debt is risky. 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 example, we've discovered 1 warning sign for Yusys Technologies that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.