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.' 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. As with many other companies Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenyang Blue Silver Industry Automation Equipment

What Is Shenyang Blue Silver Industry Automation Equipment's Debt?

The image below, which you can click on for greater detail, shows that Shenyang Blue Silver Industry Automation Equipment had debt of CN¥521.3m at the end of September 2023, a reduction from CN¥870.9m over a year. However, it does have CN¥166.9m in cash offsetting this, leading to net debt of about CN¥354.4m.

How Healthy Is Shenyang Blue Silver Industry Automation Equipment's Balance Sheet?

We can see from the most recent balance sheet that Shenyang Blue Silver Industry Automation Equipment had liabilities of CN¥911.9m falling due within a year, and liabilities of CN¥336.5m due beyond that. On the other hand, it had cash of CN¥166.9m and CN¥518.7m worth of receivables due within a year. So it has liabilities totalling CN¥562.7m more than its cash and near-term receivables, combined.

Given Shenyang Blue Silver Industry Automation Equipment has a market capitalization of CN¥6.04b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenyang Blue Silver Industry Automation Equipment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenyang Blue Silver Industry Automation Equipment wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥1.5b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Shenyang Blue Silver Industry Automation Equipment still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥50m. 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¥96m of cash over the last year. So to be blunt we think it is risky. 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. Case in point: We've spotted 3 warning signs for Shenyang Blue Silver Industry Automation Equipment you should be aware of, and 2 of them shouldn't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.