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 ATRenew Inc. (NYSE:RERE) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is ATRenew's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 ATRenew had debt of CN¥560.4m, up from CN¥319.0m in one year. However, its balance sheet shows it holds CN¥2.08b in cash, so it actually has CN¥1.52b net cash.

How Healthy Is ATRenew's Balance Sheet?

The latest balance sheet data shows that ATRenew had liabilities of CN¥1.42b due within a year, and liabilities of CN¥75.4m falling due after that. Offsetting these obligations, it had cash of CN¥2.08b as well as receivables valued at CN¥139.6m due within 12 months. So it can boast CN¥726.6m more liquid assets than total liabilities.

This excess liquidity suggests that ATRenew is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ATRenew has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ATRenew's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ATRenew wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CN¥14b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ATRenew?

While ATRenew lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥159m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 30% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a 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. To that end, you should be aware of the 2 warning signs we've spotted with ATRenew .

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.