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.' 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 can see that NAURA Technology Group Co., Ltd. (SZSE:002371) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for NAURA Technology Group

How Much Debt Does NAURA Technology Group Carry?

As you can see below, at the end of June 2022, NAURA Technology Group had CN¥1.77b of debt, up from CN¥1.45b a year ago. Click the image for more detail. But on the other hand it also has CN¥8.24b in cash, leading to a CN¥6.47b net cash position.

How Strong Is NAURA Technology Group's Balance Sheet?

The latest balance sheet data shows that NAURA Technology Group had liabilities of CN¥13.0b due within a year, and liabilities of CN¥4.15b falling due after that. On the other hand, it had cash of CN¥8.24b and CN¥4.82b worth of receivables due within a year. So it has liabilities totalling CN¥4.13b more than its cash and near-term receivables, combined.

Given NAURA Technology Group has a humongous market capitalization of CN¥164.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, NAURA Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, NAURA Technology Group grew its EBIT by 242% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if NAURA Technology Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NAURA Technology Group 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. During the last three years, NAURA Technology Group burned a lot of cash. 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 look at a company's total liabilities, it is very reassuring that NAURA Technology Group has CN¥6.47b in net cash. And it impressed us with its EBIT growth of 242% over the last year. So we don't have any problem with NAURA Technology Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for NAURA Technology Group (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.