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 Xiamen Wanli Stone Stock Co.,Ltd (SZSE:002785) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Xiamen Wanli Stone StockLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Xiamen Wanli Stone StockLtd had CN¥176.4m of debt in September 2024, down from CN¥303.1m, one year before. However, its balance sheet shows it holds CN¥179.4m in cash, so it actually has CN¥3.04m net cash.

How Strong Is Xiamen Wanli Stone StockLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xiamen Wanli Stone StockLtd had liabilities of CN¥574.9m due within 12 months and liabilities of CN¥10.2m due beyond that. On the other hand, it had cash of CN¥179.4m and CN¥650.7m worth of receivables due within a year. So it can boast CN¥245.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Xiamen Wanli Stone StockLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Xiamen Wanli Stone StockLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Xiamen Wanli Stone StockLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Xiamen Wanli Stone StockLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Xiamen Wanli Stone StockLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Xiamen Wanli Stone StockLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥114m and booked a CN¥36m accounting loss. However, it has net cash of CN¥3.04m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Xiamen Wanli Stone StockLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.