Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Fortune Ng Fung Food (Hebei) Co.,Ltd (SHSE:600965) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Fortune Ng Fung Food (Hebei)Ltd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Fortune Ng Fung Food (Hebei)Ltd had debt of CN¥80.0m, up from none in one year. But it also has CN¥100.4m in cash to offset that, meaning it has CN¥20.5m net cash.

How Healthy Is Fortune Ng Fung Food (Hebei)Ltd's Balance Sheet?

The latest balance sheet data shows that Fortune Ng Fung Food (Hebei)Ltd had liabilities of CN¥352.5m due within a year, and liabilities of CN¥105.6m falling due after that. Offsetting these obligations, it had cash of CN¥100.4m as well as receivables valued at CN¥121.5m due within 12 months. So its liabilities total CN¥236.2m more than the combination of its cash and short-term receivables.

Given Fortune Ng Fung Food (Hebei)Ltd has a market capitalization of CN¥4.05b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Fortune Ng Fung Food (Hebei)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Fortune Ng Fung Food (Hebei)Ltd if management cannot prevent a repeat of the 67% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fortune Ng Fung Food (Hebei)Ltd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fortune Ng Fung Food (Hebei)Ltd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Fortune Ng Fung Food (Hebei)Ltd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fortune Ng Fung Food (Hebei)Ltd has CN¥20.5m in net cash. So although we see some areas for improvement, we're not too worried about Fortune Ng Fung Food (Hebei)Ltd's balance sheet. 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 2 warning signs for Fortune Ng Fung Food (Hebei)Ltd you should know about.

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.