Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Nanjing Public Utilities Development Co., Ltd. (SZSE:000421) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Nanjing Public Utilities Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Nanjing Public Utilities Development had CN¥4.15b of debt, an increase on CN¥3.37b, over one year. However, it does have CN¥1.51b in cash offsetting this, leading to net debt of about CN¥2.63b.

How Strong Is Nanjing Public Utilities Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanjing Public Utilities Development had liabilities of CN¥9.55b due within 12 months and liabilities of CN¥2.44b due beyond that. On the other hand, it had cash of CN¥1.51b and CN¥754.3m worth of receivables due within a year. So its liabilities total CN¥9.73b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥4.04b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Nanjing Public Utilities Development would likely require a major re-capitalisation if it had to pay its creditors today. 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 Public Utilities Development 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 Public Utilities Development had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥4.9b. That makes us nervous, to say the least.

Caveat Emptor

While Nanjing Public Utilities Development'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¥51m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥1.0b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Nanjing Public Utilities Development has 3 warning signs we think 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.

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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.