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. Importantly, Ocean's King Lighting Science & Technology Co., Ltd (SZSE:002724) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ocean's King Lighting Science & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Ocean's King Lighting Science & Technology had CN¥36.3m of debt, an increase on CN¥30.0m, over one year. But on the other hand it also has CN¥967.2m in cash, leading to a CN¥930.9m net cash position.

How Healthy Is Ocean's King Lighting Science & Technology's Balance Sheet?

The latest balance sheet data shows that Ocean's King Lighting Science & Technology had liabilities of CN¥631.6m due within a year, and liabilities of CN¥19.0m falling due after that. On the other hand, it had cash of CN¥967.2m and CN¥1.23b worth of receivables due within a year. So it can boast CN¥1.54b more liquid assets than total liabilities.

This excess liquidity is a great indication that Ocean's King Lighting Science & Technology's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ocean's King Lighting Science & Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ocean's King Lighting Science & Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ocean's King Lighting Science & Technology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Ocean's King Lighting Science & Technology?

While Ocean's King Lighting Science & Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥6.9m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Ocean's King Lighting Science & Technology you should be aware of, and 1 of them is a bit concerning.

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.