Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CRRC Corporation Limited (SHSE:601766) 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?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does CRRC Carry?

You can click the graphic below for the historical numbers, but it shows that CRRC had CN¥14.5b of debt in September 2024, down from CN¥30.3b, one year before. However, its balance sheet shows it holds CN¥55.4b in cash, so it actually has CN¥40.9b net cash.

How Strong Is CRRC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CRRC had liabilities of CN¥273.5b due within 12 months and liabilities of CN¥24.2b due beyond that. Offsetting these obligations, it had cash of CN¥55.4b as well as receivables valued at CN¥171.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥71.2b.

While this might seem like a lot, it is not so bad since CRRC has a huge market capitalization of CN¥223.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, CRRC boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that CRRC grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CRRC can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. CRRC 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. Over the last three years, CRRC actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While CRRC does have more liabilities than liquid assets, it also has net cash of CN¥40.9b. And it impressed us with free cash flow of CN¥17b, being 117% of its EBIT. So we don't think CRRC's use of debt is risky. 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. For example - CRRC has 1 warning sign we think 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.