The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Nanjing Canatal Data-Centre Environmental Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Nanjing Canatal Data-Centre Environmental Tech had CN¥1.12b of debt, an increase on CN¥665.8m, over one year. However, it does have CN¥1.83b in cash offsetting this, leading to net cash of CN¥716.0m.

How Healthy Is Nanjing Canatal Data-Centre Environmental Tech's Balance Sheet?

According to the last reported balance sheet, Nanjing Canatal Data-Centre Environmental Tech had liabilities of CN¥1.27b due within 12 months, and liabilities of CN¥309.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.83b as well as receivables valued at CN¥398.9m due within 12 months. So it can boast CN¥648.9m more liquid assets than total liabilities.

This surplus suggests that Nanjing Canatal Data-Centre Environmental Tech is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nanjing Canatal Data-Centre Environmental Tech has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Nanjing Canatal Data-Centre Environmental Tech 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.

In the last year Nanjing Canatal Data-Centre Environmental Tech wasn't profitable at an EBIT level, but managed to grow its revenue by 6.7%, to CN¥646m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Nanjing Canatal Data-Centre Environmental Tech?

While Nanjing Canatal Data-Centre Environmental Tech lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥29m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nanjing Canatal Data-Centre Environmental Tech (of which 2 are a bit unpleasant!) you should know about.

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.