Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tianshui Huatian Technology Co., Ltd. (SZSE:002185) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tianshui Huatian Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Tianshui Huatian Technology had debt of CN¥12.8b, up from CN¥9.01b in one year. On the flip side, it has CN¥7.68b in cash leading to net debt of about CN¥5.14b.

A Look At Tianshui Huatian Technology's Liabilities

We can see from the most recent balance sheet that Tianshui Huatian Technology had liabilities of CN¥9.71b falling due within a year, and liabilities of CN¥8.60b due beyond that. Offsetting this, it had CN¥7.68b in cash and CN¥2.80b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.83b.

This deficit isn't so bad because Tianshui Huatian Technology is worth CN¥38.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Tianshui Huatian 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 Tianshui Huatian Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to CN¥14b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Tianshui Huatian Technology's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥153m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥2.1b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tianshui Huatian Technology that you should be aware of.

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.