Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Weifu High-Technology Group Co., Ltd. (SZSE:000581) does have debt on its balance sheet. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Weifu High-Technology Group Carry?

As you can see below, Weifu High-Technology Group had CN¥1.74b of debt at September 2023, down from CN¥4.14b a year prior. However, its balance sheet shows it holds CN¥4.81b in cash, so it actually has CN¥3.07b net cash.

How Strong Is Weifu High-Technology Group's Balance Sheet?

The latest balance sheet data shows that Weifu High-Technology Group had liabilities of CN¥7.01b due within a year, and liabilities of CN¥905.5m falling due after that. Offsetting this, it had CN¥4.81b in cash and CN¥6.43b in receivables that were due within 12 months. So it can boast CN¥3.32b more liquid assets than total liabilities.

This surplus suggests that Weifu High-Technology Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Weifu High-Technology Group 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 it is future earnings, more than anything, that will determine Weifu High-Technology Group'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.

In the last year Weifu High-Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to CN¥11b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Weifu High-Technology Group?

Although Weifu High-Technology Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥174m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 instance, we've identified 2 warning signs for Weifu High-Technology Group that you should be aware of.

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.

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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.