Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Shandong Chiway Industry Development Co.,Ltd (SZSE:002374) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shandong Chiway Industry DevelopmentLtd's Debt?

The chart below, which you can click on for greater detail, shows that Shandong Chiway Industry DevelopmentLtd had CN¥1.68b in debt in September 2024; about the same as the year before. However, it does have CN¥104.9m in cash offsetting this, leading to net debt of about CN¥1.58b.

A Look At Shandong Chiway Industry DevelopmentLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Shandong Chiway Industry DevelopmentLtd had liabilities of CN¥1.83b due within 12 months and liabilities of CN¥711.3m due beyond that. Offsetting this, it had CN¥104.9m in cash and CN¥1.91b in receivables that were due within 12 months. So its liabilities total CN¥526.5m more than the combination of its cash and short-term receivables.

Since publicly traded Shandong Chiway Industry DevelopmentLtd shares are worth a total of CN¥3.68b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shandong Chiway Industry DevelopmentLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shandong Chiway Industry DevelopmentLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Shandong Chiway Industry DevelopmentLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥211m at the EBIT level. 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¥6.9m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. For example - Shandong Chiway Industry DevelopmentLtd has 1 warning sign we think you should be aware of.

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.