Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Jiangsu HSC New Energy Materials Co.,LTD. (SHSE:688353) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu HSC New Energy MaterialsLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu HSC New Energy MaterialsLTD had CN¥162.9m of debt, an increase on CN¥116.4m, over one year. But on the other hand it also has CN¥1.91b in cash, leading to a CN¥1.74b net cash position.

How Healthy Is Jiangsu HSC New Energy MaterialsLTD's Balance Sheet?

According to the last reported balance sheet, Jiangsu HSC New Energy MaterialsLTD had liabilities of CN¥343.2m due within 12 months, and liabilities of CN¥213.2m due beyond 12 months. Offsetting this, it had CN¥1.91b in cash and CN¥272.2m in receivables that were due within 12 months. So it can boast CN¥1.62b more liquid assets than total liabilities.

This excess liquidity is a great indication that Jiangsu HSC New Energy MaterialsLTD's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Jiangsu HSC New Energy MaterialsLTD has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Jiangsu HSC New Energy MaterialsLTD 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.

Over 12 months, Jiangsu HSC New Energy MaterialsLTD made a loss at the EBIT level, and saw its revenue drop to CN¥460m, which is a fall of 17%. We would much prefer see growth.

So How Risky Is Jiangsu HSC New Energy MaterialsLTD?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Jiangsu HSC New Energy MaterialsLTD lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥432m of cash and made a loss of CN¥181m. Given it only has net cash of CN¥1.74b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs for Jiangsu HSC New Energy MaterialsLTD you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.