David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Hainan Drinda New Energy Technology Co., Ltd. (SZSE:002865) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Hainan Drinda New Energy Technology's Debt?

As you can see below, at the end of September 2024, Hainan Drinda New Energy Technology had CN¥3.80b of debt, up from CN¥3.03b a year ago. Click the image for more detail. However, it also had CN¥3.22b in cash, and so its net debt is CN¥575.7m.

How Healthy Is Hainan Drinda New Energy Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hainan Drinda New Energy Technology had liabilities of CN¥5.98b due within 12 months and liabilities of CN¥6.66b due beyond that. Offsetting these obligations, it had cash of CN¥3.22b as well as receivables valued at CN¥908.3m due within 12 months. So it has liabilities totalling CN¥8.51b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥13.7b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hainan Drinda New Energy Technology'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, Hainan Drinda New Energy Technology made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

While Hainan Drinda New Energy Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥483m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥1.2b into a profit. In the meantime, we consider the stock very 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. Case in point: We've spotted 2 warning signs for Hainan Drinda New Energy Technology you should be aware of.

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.