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.' 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. Importantly, Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Debt?

As you can see below, Shijiazhuang ChangShan BeiMing TechnologyLtd had CN¥5.41b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥1.22b in cash offsetting this, leading to net debt of about CN¥4.19b.

How Strong Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Shijiazhuang ChangShan BeiMing TechnologyLtd had liabilities of CN¥9.53b due within 12 months, and liabilities of CN¥1.53b due beyond 12 months. Offsetting this, it had CN¥1.22b in cash and CN¥3.53b in receivables that were due within 12 months. So its liabilities total CN¥6.31b more than the combination of its cash and short-term receivables.

Since publicly traded Shijiazhuang ChangShan BeiMing TechnologyLtd shares are worth a total of CN¥50.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shijiazhuang ChangShan BeiMing TechnologyLtd 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 Shijiazhuang ChangShan BeiMing TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to CN¥9.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shijiazhuang ChangShan BeiMing TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥239m 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. 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¥250m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Shijiazhuang ChangShan BeiMing TechnologyLtd , and understanding them should be part of your investment process.

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.