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 can see that Anhui Xinke New Materials Co.,Ltd (SHSE:600255) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anhui Xinke New MaterialsLtd

What Is Anhui Xinke New MaterialsLtd's Debt?

As you can see below, at the end of September 2023, Anhui Xinke New MaterialsLtd had CN¥698.5m of debt, up from CN¥530.4m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥669.0m, its net debt is less, at about CN¥29.4m.

How Healthy Is Anhui Xinke New MaterialsLtd's Balance Sheet?

According to the last reported balance sheet, Anhui Xinke New MaterialsLtd had liabilities of CN¥1.88b due within 12 months, and liabilities of CN¥256.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥669.0m as well as receivables valued at CN¥534.5m due within 12 months. So its liabilities total CN¥929.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Anhui Xinke New MaterialsLtd has a market capitalization of CN¥4.01b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, Anhui Xinke New MaterialsLtd has virtually no net debt, 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 you can't view debt in total isolation; since Anhui Xinke New 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.

In the last year Anhui Xinke New MaterialsLtd had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to CN¥3.0b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Anhui Xinke New MaterialsLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥5.2m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥308m of cash over the last year. So in short it's a really risky stock. For riskier companies like Anhui Xinke New MaterialsLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.