Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Nanjing Panda Electronics Company Limited (SHSE:600775) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Nanjing Panda Electronics's Debt?

As you can see below, at the end of September 2024, Nanjing Panda Electronics had CN¥45.7m of debt, up from CN¥18.1m a year ago. Click the image for more detail. However, it does have CN¥1.26b in cash offsetting this, leading to net cash of CN¥1.21b.

A Look At Nanjing Panda Electronics' Liabilities

We can see from the most recent balance sheet that Nanjing Panda Electronics had liabilities of CN¥1.75b falling due within a year, and liabilities of CN¥49.9m due beyond that. Offsetting this, it had CN¥1.26b in cash and CN¥1.53b in receivables that were due within 12 months. So it actually has CN¥978.1m more liquid assets than total liabilities.

This surplus suggests that Nanjing Panda Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Panda Electronics 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 it is Nanjing Panda Electronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Nanjing Panda Electronics had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥2.8b. We would much prefer see growth.

So How Risky Is Nanjing Panda Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Nanjing Panda Electronics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥272m of cash and made a loss of CN¥305m. With only CN¥1.21b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 instance, we've identified 1 warning sign for Nanjing Panda Electronics that you should be aware of.

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.