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 note that CloudWalk Technology Co., Ltd. (SHSE:688327) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 CloudWalk Technology Carry?

You can click the graphic below for the historical numbers, but it shows that CloudWalk Technology had CN¥659.2m of debt in September 2023, down from CN¥877.3m, one year before. However, its balance sheet shows it holds CN¥1.45b in cash, so it actually has CN¥786.9m net cash.

How Healthy Is CloudWalk Technology's Balance Sheet?

According to the last reported balance sheet, CloudWalk Technology had liabilities of CN¥1.11b due within 12 months, and liabilities of CN¥164.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.45b as well as receivables valued at CN¥745.6m due within 12 months. So it can boast CN¥913.7m more liquid assets than total liabilities.

This surplus suggests that CloudWalk Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, CloudWalk Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CloudWalk Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year CloudWalk Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CN¥629m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is CloudWalk Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months CloudWalk Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥483m of cash and made a loss of CN¥630m. But the saving grace is the CN¥786.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 2 warning signs we've spotted with CloudWalk Technology (including 1 which is concerning) .

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.