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.' 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. We note that LianChuang Electronic Technology Co.,Ltd (SZSE:002036) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does LianChuang Electronic TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 LianChuang Electronic TechnologyLtd had CN¥8.71b of debt, an increase on CN¥7.68b, over one year. However, it also had CN¥2.26b in cash, and so its net debt is CN¥6.44b.

How Strong Is LianChuang Electronic TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LianChuang Electronic TechnologyLtd had liabilities of CN¥8.60b due within 12 months and liabilities of CN¥4.09b due beyond that. Offsetting this, it had CN¥2.26b in cash and CN¥3.31b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.11b.

This is a mountain of leverage relative to its market capitalization of CN¥7.72b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if LianChuang Electronic TechnologyLtd 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.

In the last year LianChuang Electronic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to CN¥10b. That's not what we would hope to see.

Caveat Emptor

Importantly, LianChuang Electronic TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥698m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥1.6b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that LianChuang Electronic TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com