The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CPT Technology (Group) Co.,Ltd (SZSE:000536) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

How Much Debt Does CPT Technology (Group)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 CPT Technology (Group)Ltd had CN¥3.55b of debt, an increase on CN¥3.33b, over one year. However, because it has a cash reserve of CN¥1.06b, its net debt is less, at about CN¥2.49b.

A Look At CPT Technology (Group)Ltd's Liabilities

The latest balance sheet data shows that CPT Technology (Group)Ltd had liabilities of CN¥3.61b due within a year, and liabilities of CN¥1.29b falling due after that. On the other hand, it had cash of CN¥1.06b and CN¥184.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.66b.

CPT Technology (Group)Ltd has a market capitalization of CN¥7.16b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CPT Technology (Group)Ltd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year CPT Technology (Group)Ltd had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥1.5b. To be frank that doesn't bode well.

Caveat Emptor

While CPT Technology (Group)Ltd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.2b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥607m of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like CPT Technology (Group)Ltd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.