The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Zhejiang NetSun Co., Ltd. (SZSE:002095) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang NetSun's Debt?

As you can see below, Zhejiang NetSun had CN¥36.8m of debt at September 2024, down from CN¥63.1m a year prior. However, its balance sheet shows it holds CN¥438.2m in cash, so it actually has CN¥401.4m net cash.

A Look At Zhejiang NetSun's Liabilities

The latest balance sheet data shows that Zhejiang NetSun had liabilities of CN¥285.1m due within a year, and liabilities of CN¥21.3m falling due after that. Offsetting this, it had CN¥438.2m in cash and CN¥250.2m in receivables that were due within 12 months. So it actually has CN¥382.0m more liquid assets than total liabilities.

This surplus suggests that Zhejiang NetSun has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zhejiang NetSun boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Zhejiang NetSun's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Zhejiang NetSun reported revenue of CN¥500m, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zhejiang NetSun?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhejiang NetSun lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥228m of cash and made a loss of CN¥11m. With only CN¥401.4m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Zhejiang NetSun may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 - Zhejiang NetSun has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.