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 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 Anhui Hwasu Co.,Ltd. (SHSE:600935) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Anhui HwasuLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Anhui HwasuLtd had debt of CN¥210.7m, up from none in one year. However, it does have CN¥871.1m in cash offsetting this, leading to net cash of CN¥660.4m.

A Look At Anhui HwasuLtd's Liabilities

According to the last reported balance sheet, Anhui HwasuLtd had liabilities of CN¥2.19b due within 12 months, and liabilities of CN¥515.1m due beyond 12 months. Offsetting this, it had CN¥871.1m in cash and CN¥65.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.77b.

Given Anhui HwasuLtd has a market capitalization of CN¥9.79b, 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. Despite its noteworthy liabilities, Anhui HwasuLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Anhui HwasuLtd'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, Anhui HwasuLtd made a loss at the EBIT level, and saw its revenue drop to CN¥5.4b, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Anhui HwasuLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Anhui HwasuLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥276m and booked a CN¥83m accounting loss. With only CN¥660.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 2 warning signs we've spotted with Anhui HwasuLtd .

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.