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.' 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. As with many other companies Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Hongdou IndustrialLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangsu Hongdou IndustrialLTD had CN¥983.4m of debt, an increase on CN¥934.0m, over one year. But on the other hand it also has CN¥1.14b in cash, leading to a CN¥157.0m net cash position.

How Healthy Is Jiangsu Hongdou IndustrialLTD's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Hongdou IndustrialLTD had liabilities of CN¥1.34b falling due within a year, and liabilities of CN¥570.7m due beyond that. On the other hand, it had cash of CN¥1.14b and CN¥658.5m worth of receivables due within a year. So its liabilities total CN¥112.0m more than the combination of its cash and short-term receivables.

Given Jiangsu Hongdou IndustrialLTD has a market capitalization of CN¥5.27b, 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. While it does have liabilities worth noting, Jiangsu Hongdou IndustrialLTD also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Hongdou IndustrialLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jiangsu Hongdou IndustrialLTD's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Jiangsu Hongdou IndustrialLTD?

While Jiangsu Hongdou IndustrialLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥27m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jiangsu Hongdou IndustrialLTD is showing 2 warning signs in our investment analysis , you should know about...

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.