Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Jiangmen Kanhoo Industry Co., Ltd (SZSE:300340) does use debt in its business. 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, 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.

How Much Debt Does Jiangmen Kanhoo Industry Carry?

The image below, which you can click on for greater detail, shows that Jiangmen Kanhoo Industry had debt of CN¥414.1m at the end of September 2024, a reduction from CN¥484.0m over a year. However, it also had CN¥203.1m in cash, and so its net debt is CN¥211.0m.

How Strong Is Jiangmen Kanhoo Industry's Balance Sheet?

According to the last reported balance sheet, Jiangmen Kanhoo Industry had liabilities of CN¥2.41b due within 12 months, and liabilities of CN¥228.5m due beyond 12 months. Offsetting this, it had CN¥203.1m in cash and CN¥857.9m in receivables that were due within 12 months. So its liabilities total CN¥1.58b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jiangmen Kanhoo Industry has a market capitalization of CN¥3.70b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangmen Kanhoo Industry 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 Jiangmen Kanhoo Industry had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥2.2b. To be frank that doesn't bode well.

Caveat Emptor

While Jiangmen Kanhoo Industry's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥311m. 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. Another cause for caution is that is bled CN¥456m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. We've identified 4 warning signs with Jiangmen Kanhoo Industry (at least 3 which are potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.