Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Haima Automobile Co.,Ltd (SZSE:000572) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Haima AutomobileLtd's Debt?

As you can see below, at the end of September 2024, Haima AutomobileLtd had CN¥249.2m of debt, up from CN¥191.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥435.7m in cash, so it actually has CN¥186.5m net cash.

How Strong Is Haima AutomobileLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Haima AutomobileLtd had liabilities of CN¥3.68b due within 12 months and liabilities of CN¥155.8m due beyond that. Offsetting this, it had CN¥435.7m in cash and CN¥2.76b in receivables that were due within 12 months. So it has liabilities totalling CN¥639.7m more than its cash and near-term receivables, combined.

Since publicly traded Haima AutomobileLtd shares are worth a total of CN¥8.16b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Haima AutomobileLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Haima AutomobileLtd'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 Haima AutomobileLtd had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥1.7b. To be frank that doesn't bode well.

So How Risky Is Haima AutomobileLtd?

While Haima AutomobileLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥3.6m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Haima AutomobileLtd you should know about.

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.