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 can see that Shandong Fiberglass Group Co., Ltd (SHSE:605006) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

What Is Shandong Fiberglass Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Shandong Fiberglass Group had debt of CN¥2.54b, up from CN¥1.89b in one year. However, because it has a cash reserve of CN¥774.4m, its net debt is less, at about CN¥1.76b.

A Look At Shandong Fiberglass Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Shandong Fiberglass Group had liabilities of CN¥1.95b due within 12 months and liabilities of CN¥2.11b due beyond that. On the other hand, it had cash of CN¥774.4m and CN¥665.7m worth of receivables due within a year. So its liabilities total CN¥2.62b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥3.75b, so it does suggest shareholders should keep an eye on Shandong Fiberglass Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Fiberglass Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shandong Fiberglass Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.0b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Shandong Fiberglass Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥161m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥723m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shandong Fiberglass Group you should know about.

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.