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 Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Shijiazhuang ChangShan BeiMing TechnologyLtd's Net Debt?

As you can see below, Shijiazhuang ChangShan BeiMing TechnologyLtd had CN¥5.55b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.62b in cash, and so its net debt is CN¥3.92b.

A Look At Shijiazhuang ChangShan BeiMing TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Shijiazhuang ChangShan BeiMing TechnologyLtd had liabilities of CN¥8.61b falling due within a year, and liabilities of CN¥1.42b due beyond that. On the other hand, it had cash of CN¥1.62b and CN¥3.17b worth of receivables due within a year. So its liabilities total CN¥5.23b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Shijiazhuang ChangShan BeiMing TechnologyLtd has a market capitalization of CN¥10.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 Shijiazhuang ChangShan BeiMing TechnologyLtd'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 Shijiazhuang ChangShan BeiMing TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 4.6%, to CN¥8.6b. That's not what we would hope to see.

Caveat Emptor

Importantly, Shijiazhuang ChangShan BeiMing TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥66m 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. For example, we would not want to see a repeat of last year's loss of CN¥146m. So in short it's a really risky stock. 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 example, we've discovered 2 warning signs for Shijiazhuang ChangShan BeiMing TechnologyLtd that you should be aware of before investing here.

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.