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 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. As with many other companies China Shipbuilding Industry Group Power Co., Ltd. (SHSE:600482) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Shipbuilding Industry Group Power's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 China Shipbuilding Industry Group Power had debt of CN¥10.7b, up from CN¥8.48b in one year. But it also has CN¥25.2b in cash to offset that, meaning it has CN¥14.5b net cash.

How Healthy Is China Shipbuilding Industry Group Power's Balance Sheet?

According to the last reported balance sheet, China Shipbuilding Industry Group Power had liabilities of CN¥37.1b due within 12 months, and liabilities of CN¥12.9b due beyond 12 months. On the other hand, it had cash of CN¥25.2b and CN¥22.5b worth of receivables due within a year. So its liabilities total CN¥2.36b more than the combination of its cash and short-term receivables.

Of course, China Shipbuilding Industry Group Power has a market capitalization of CN¥43.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, China Shipbuilding Industry Group Power 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 China Shipbuilding Industry Group Power's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, China Shipbuilding Industry Group Power reported revenue of CN¥42b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China Shipbuilding Industry Group Power?

Although China Shipbuilding Industry Group Power had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥443m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - China Shipbuilding Industry Group Power has 1 warning sign we think 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.