Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Vanjee Technology Co., Ltd. (SZSE:300552) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vanjee Technology

What Is Vanjee Technology's Net Debt?

As you can see below, at the end of September 2023, Vanjee Technology had CN¥45.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥549.7m in cash to offset that, meaning it has CN¥504.7m net cash.

How Strong Is Vanjee Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vanjee Technology had liabilities of CN¥682.1m due within 12 months and liabilities of CN¥66.9m due beyond that. Offsetting this, it had CN¥549.7m in cash and CN¥1.09b in receivables that were due within 12 months. So it actually has CN¥885.7m more liquid assets than total liabilities.

This surplus suggests that Vanjee Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Vanjee Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vanjee Technology 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.

In the last year Vanjee Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥887m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Vanjee Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Vanjee Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥133m and booked a CN¥135m accounting loss. With only CN¥504.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Vanjee Technology , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.