Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Shenzhen Nanshan Power Co., Ltd. (SZSE:000037) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shenzhen Nanshan Power's Debt?

As you can see below, Shenzhen Nanshan Power had CN¥377.3m of debt at September 2024, down from CN¥416.8m a year prior. But it also has CN¥456.6m in cash to offset that, meaning it has CN¥79.3m net cash.

How Healthy Is Shenzhen Nanshan Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Nanshan Power had liabilities of CN¥585.0m due within 12 months and liabilities of CN¥82.0m due beyond that. Offsetting this, it had CN¥456.6m in cash and CN¥146.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥63.5m more than its cash and near-term receivables, combined.

This state of affairs indicates that Shenzhen Nanshan Power's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.59b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shenzhen Nanshan Power 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 Shenzhen Nanshan Power'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.

In the last year Shenzhen Nanshan Power had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥507m. That's not what we would hope to see.

So How Risky Is Shenzhen Nanshan Power?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shenzhen Nanshan Power lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥77m of cash and made a loss of CN¥13m. But the saving grace is the CN¥79.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shenzhen Nanshan Power that 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.

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