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.' 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. We note that Xingmin Intelligent Transportation Systems (Group) Co., Ltd. (SZSE:002355) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Xingmin Intelligent Transportation Systems (Group) Carry?

The image below, which you can click on for greater detail, shows that Xingmin Intelligent Transportation Systems (Group) had debt of CN¥463.4m at the end of September 2024, a reduction from CN¥613.1m over a year. However, it does have CN¥100.4m in cash offsetting this, leading to net debt of about CN¥363.0m.

How Strong Is Xingmin Intelligent Transportation Systems (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Xingmin Intelligent Transportation Systems (Group) had liabilities of CN¥1.02b falling due within a year, and liabilities of CN¥213.9m due beyond that. Offsetting these obligations, it had cash of CN¥100.4m as well as receivables valued at CN¥181.5m due within 12 months. So its liabilities total CN¥953.7m more than the combination of its cash and short-term receivables.

Xingmin Intelligent Transportation Systems (Group) has a market capitalization of CN¥4.04b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xingmin Intelligent Transportation Systems (Group)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xingmin Intelligent Transportation Systems (Group)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Xingmin Intelligent Transportation Systems (Group) had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥136m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥18m. So we do think this stock is quite risky. 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. For example, we've discovered 1 warning sign for Xingmin Intelligent Transportation Systems (Group) that you should be aware of before investing here.

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.