Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Shanghai New Power Automotive Technology Company Limited (SHSE:600841) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shanghai New Power Automotive Technology's Debt?

The image below, which you can click on for greater detail, shows that Shanghai New Power Automotive Technology had debt of CN¥3.54b at the end of December 2023, a reduction from CN¥3.85b over a year. However, its balance sheet shows it holds CN¥6.22b in cash, so it actually has CN¥2.68b net cash.

How Strong Is Shanghai New Power Automotive Technology's Balance Sheet?

The latest balance sheet data shows that Shanghai New Power Automotive Technology had liabilities of CN¥11.3b due within a year, and liabilities of CN¥1.29b falling due after that. Offsetting these obligations, it had cash of CN¥6.22b as well as receivables valued at CN¥5.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.11b.

Of course, Shanghai New Power Automotive Technology has a market capitalization of CN¥6.41b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shanghai New Power Automotive Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai New Power Automotive Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shanghai New Power Automotive Technology made a loss at the EBIT level, and saw its revenue drop to CN¥8.7b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Shanghai New Power Automotive Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shanghai New Power Automotive Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥213m of cash and made a loss of CN¥2.5b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥2.68b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Shanghai New Power Automotive Technology .

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.