Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Changzhou Shichuang Energy Co.,Ltd. (SHSE:688429) makes use of debt. But is this debt a concern to shareholders?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Changzhou Shichuang EnergyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Changzhou Shichuang EnergyLtd had CN¥526.9m of debt, an increase on none, over one year. But on the other hand it also has CN¥888.8m in cash, leading to a CN¥361.9m net cash position.

How Strong Is Changzhou Shichuang EnergyLtd's Balance Sheet?

According to the last reported balance sheet, Changzhou Shichuang EnergyLtd had liabilities of CN¥1.25b due within 12 months, and liabilities of CN¥229.0m due beyond 12 months. Offsetting this, it had CN¥888.8m in cash and CN¥449.4m in receivables that were due within 12 months. So its liabilities total CN¥140.0m more than the combination of its cash and short-term receivables.

Since publicly traded Changzhou Shichuang EnergyLtd shares are worth a total of CN¥6.98b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Changzhou Shichuang EnergyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Changzhou Shichuang EnergyLtd'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.

Over 12 months, Changzhou Shichuang EnergyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥839m, which is a fall of 59%. To be frank that doesn't bode well.

So How Risky Is Changzhou Shichuang EnergyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Changzhou Shichuang EnergyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥679m of cash and made a loss of CN¥499m. Given it only has net cash of CN¥361.9m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Changzhou Shichuang EnergyLtd that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.