Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Shandong Xinneng Taishan Power Generation Co.,Ltd. (SZSE:000720) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shandong Xinneng Taishan Power GenerationLtd

What Is Shandong Xinneng Taishan Power GenerationLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shandong Xinneng Taishan Power GenerationLtd had debt of CN¥2.06b, up from CN¥1.84b in one year. However, it also had CN¥136.7m in cash, and so its net debt is CN¥1.92b.

How Strong Is Shandong Xinneng Taishan Power GenerationLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shandong Xinneng Taishan Power GenerationLtd had liabilities of CN¥2.19b due within 12 months and liabilities of CN¥477.4m due beyond that. On the other hand, it had cash of CN¥136.7m and CN¥1.39b worth of receivables due within a year. So its liabilities total CN¥1.14b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shandong Xinneng Taishan Power GenerationLtd is worth CN¥4.90b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Shandong Xinneng Taishan Power GenerationLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shandong Xinneng Taishan Power GenerationLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Shandong Xinneng Taishan Power GenerationLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥37m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥100m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 2 warning signs for Shandong Xinneng Taishan Power GenerationLtd that you should be aware of.

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.