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 Nanjing Canatal Data-Centre Environmental Tech Co., Ltd (SHSE:603912) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nanjing Canatal Data-Centre Environmental Tech

What Is Nanjing Canatal Data-Centre Environmental Tech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Nanjing Canatal Data-Centre Environmental Tech had debt of CN¥841.0m, up from CN¥721.6m in one year. But it also has CN¥1.79b in cash to offset that, meaning it has CN¥946.0m net cash.

How Strong Is Nanjing Canatal Data-Centre Environmental Tech's Balance Sheet?

We can see from the most recent balance sheet that Nanjing Canatal Data-Centre Environmental Tech had liabilities of CN¥1.02b falling due within a year, and liabilities of CN¥299.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.79b as well as receivables valued at CN¥342.6m due within 12 months. So it actually has CN¥806.4m more liquid assets than total liabilities.

It's good to see that Nanjing Canatal Data-Centre Environmental Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Nanjing Canatal Data-Centre Environmental Tech has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nanjing Canatal Data-Centre Environmental Tech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Nanjing Canatal Data-Centre Environmental Tech reported revenue of CN¥598m, which is a gain of 6.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Nanjing Canatal Data-Centre Environmental Tech?

Although Nanjing Canatal Data-Centre Environmental Tech had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥36m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Nanjing Canatal Data-Centre Environmental Tech (of which 1 is potentially serious!) 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.