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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Business-intelligence of Oriental Nations Corporation Ltd. (SZSE:300166) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Business-intelligence of Oriental Nations's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Business-intelligence of Oriental Nations had CN¥966.0m of debt, an increase on CN¥812.3m, over one year. However, it also had CN¥573.1m in cash, and so its net debt is CN¥392.9m.

How Strong Is Business-intelligence of Oriental Nations' Balance Sheet?

According to the last reported balance sheet, Business-intelligence of Oriental Nations had liabilities of CN¥1.44b due within 12 months, and liabilities of CN¥451.4m due beyond 12 months. Offsetting this, it had CN¥573.1m in cash and CN¥2.22b in receivables that were due within 12 months. So it can boast CN¥895.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Business-intelligence of Oriental Nations could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 Business-intelligence of Oriental Nations'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, Business-intelligence of Oriental Nations reported revenue of CN¥2.5b, which is a gain of 6.9%, 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.

Caveat Emptor

Importantly, Business-intelligence of Oriental Nations had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥455m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Business-intelligence of Oriental Nations's profit, revenue, and operating cashflow have changed over the last few years.

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.