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.' 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. As with many other companies Grand Industrial Holding Co.,Ltd (SZSE:000626) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Grand Industrial HoldingLtd Carry?

The image below, which you can click on for greater detail, shows that Grand Industrial HoldingLtd had debt of CN¥1.11b at the end of September 2024, a reduction from CN¥1.75b over a year. However, it does have CN¥3.10b in cash offsetting this, leading to net cash of CN¥1.99b.

How Strong Is Grand Industrial HoldingLtd's Balance Sheet?

The latest balance sheet data shows that Grand Industrial HoldingLtd had liabilities of CN¥5.14b due within a year, and liabilities of CN¥554.2m falling due after that. Offsetting this, it had CN¥3.10b in cash and CN¥1.02b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.57b.

Grand Industrial HoldingLtd has a market capitalization of CN¥3.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Grand Industrial HoldingLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Grand Industrial HoldingLtd 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 Grand Industrial HoldingLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 2.5%, to CN¥88b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Grand Industrial HoldingLtd?

While Grand Industrial HoldingLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥618m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 1 warning sign with Grand Industrial HoldingLtd , and understanding them should be part of your investment process.

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.