Is Eastone Century TechnologyLtd (SZSE:300310) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Eastone Century Technology Co.,Ltd. (SZSE:300310) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Eastone Century TechnologyLtd

What Is Eastone Century TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Eastone Century TechnologyLtd had debt of CN¥131.2m at the end of September 2024, a reduction from CN¥207.1m over a year. But it also has CN¥632.3m in cash to offset that, meaning it has CN¥501.1m net cash.

How Strong Is Eastone Century TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Eastone Century TechnologyLtd had liabilities of CN¥1.09b due within 12 months, and liabilities of CN¥42.5m due beyond 12 months. On the other hand, it had cash of CN¥632.3m and CN¥1.08b worth of receivables due within a year. So it can boast CN¥574.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Eastone Century TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Eastone Century TechnologyLtd 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 Eastone Century TechnologyLtd'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.

Over 12 months, Eastone Century TechnologyLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Eastone Century TechnologyLtd?

Although Eastone Century TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥65m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Eastone Century TechnologyLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.