Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Addsino Co., Ltd. (SZSE:000547) does carry debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Addsino's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Addsino had CN¥997.9m of debt, an increase on CN¥895.1m, over one year. But it also has CN¥1.34b in cash to offset that, meaning it has CN¥338.7m net cash.

How Strong Is Addsino's Balance Sheet?

The latest balance sheet data shows that Addsino had liabilities of CN¥4.40b due within a year, and liabilities of CN¥469.2m falling due after that. Offsetting this, it had CN¥1.34b in cash and CN¥2.80b in receivables that were due within 12 months. So it has liabilities totalling CN¥734.5m more than its cash and near-term receivables, combined.

Of course, Addsino has a market capitalization of CN¥12.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Addsino 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 it is Addsino's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Addsino had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥1.5b. To be frank that doesn't bode well.

So How Risky Is Addsino?

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 Addsino had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥341m of cash and made a loss of CN¥2.0b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥338.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Addsino has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.