Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that 37 Interactive Entertainment Network Technology Group Co., Ltd. (SZSE:002555) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does 37 Interactive Entertainment Network Technology Group Carry?

The image below, which you can click on for greater detail, shows that at September 2023 37 Interactive Entertainment Network Technology Group had debt of CN¥1.83b, up from CN¥1.22b in one year. However, it does have CN¥8.62b in cash offsetting this, leading to net cash of CN¥6.79b.

How Healthy Is 37 Interactive Entertainment Network Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that 37 Interactive Entertainment Network Technology Group had liabilities of CN¥5.85b due within 12 months and liabilities of CN¥425.5m due beyond that. Offsetting this, it had CN¥8.62b in cash and CN¥1.51b in receivables that were due within 12 months. So it actually has CN¥3.85b more liquid assets than total liabilities.

This surplus suggests that 37 Interactive Entertainment Network Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 37 Interactive Entertainment Network Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, 37 Interactive Entertainment Network Technology Group's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if 37 Interactive Entertainment Network 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While 37 Interactive Entertainment Network Technology Group 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. Happily for any shareholders, 37 Interactive Entertainment Network Technology Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case 37 Interactive Entertainment Network Technology Group has CN¥6.79b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in CN¥3.1b. So we don't think 37 Interactive Entertainment Network Technology Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - 37 Interactive Entertainment Network Technology Group has 1 warning sign we think you should be aware of.

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.

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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.