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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Guangdong Kingshine Electronic Technology Co.,Ltd. (SZSE:300903) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Guangdong Kingshine Electronic TechnologyLtd's Net Debt?

As you can see below, at the end of September 2024, Guangdong Kingshine Electronic TechnologyLtd had CN¥1.37b of debt, up from CN¥1.09b a year ago. Click the image for more detail. However, it also had CN¥847.3m in cash, and so its net debt is CN¥518.5m.

How Healthy Is Guangdong Kingshine Electronic TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Kingshine Electronic TechnologyLtd had liabilities of CN¥4.48b due within 12 months and liabilities of CN¥700.3m due beyond that. Offsetting these obligations, it had cash of CN¥847.3m as well as receivables valued at CN¥2.05b due within 12 months. So its liabilities total CN¥2.29b more than the combination of its cash and short-term receivables.

Guangdong Kingshine Electronic TechnologyLtd has a market capitalization of CN¥4.20b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Guangdong Kingshine Electronic TechnologyLtd'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.

Over 12 months, Guangdong Kingshine Electronic TechnologyLtd reported revenue of CN¥3.3b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Guangdong Kingshine Electronic TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥326m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥546m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Guangdong Kingshine Electronic TechnologyLtd .

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.