Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Nanya New Material Technology Co.,Ltd (SHSE:688519) does carry 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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Nanya New Material TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Nanya New Material TechnologyLtd had CN¥406.2m of debt in March 2024, down from CN¥438.4m, one year before. But on the other hand it also has CN¥432.9m in cash, leading to a CN¥26.7m net cash position.

How Healthy Is Nanya New Material TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Nanya New Material TechnologyLtd had liabilities of CN¥1.77b falling due within a year, and liabilities of CN¥202.3m due beyond that. Offsetting these obligations, it had cash of CN¥432.9m as well as receivables valued at CN¥1.82b due within 12 months. So it actually has CN¥277.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanya New Material TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanya New Material TechnologyLtd 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 you can't view debt in total isolation; since Nanya New Material TechnologyLtd 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.

Over 12 months, Nanya New Material TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Nanya New Material TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Nanya New Material TechnologyLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥139m of cash and made a loss of CN¥110m. But the saving grace is the CN¥26.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Nanya New Material TechnologyLtd you should be aware of.

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.

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