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. As with many other companies Shenzhen Hello Tech Energy Co., Ltd. (SZSE:301327) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

How Much Debt Does Shenzhen Hello Tech Energy Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Shenzhen Hello Tech Energy had CN¥687.6m of debt, an increase on CN¥176.7m, over one year. However, its balance sheet shows it holds CN¥5.57b in cash, so it actually has CN¥4.88b net cash.

A Look At Shenzhen Hello Tech Energy's Liabilities

We can see from the most recent balance sheet that Shenzhen Hello Tech Energy had liabilities of CN¥1.14b falling due within a year, and liabilities of CN¥59.5m due beyond that. Offsetting this, it had CN¥5.57b in cash and CN¥104.8m in receivables that were due within 12 months. So it can boast CN¥4.47b more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenzhen Hello Tech Energy's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Shenzhen Hello Tech Energy has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Hello Tech Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Shenzhen Hello Tech Energy made a loss at the EBIT level, and saw its revenue drop to CN¥2.6b, which is a fall of 15%. That's not what we would hope to see.

So How Risky Is Shenzhen Hello Tech Energy?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shenzhen Hello Tech Energy had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥340m of cash and made a loss of CN¥30m. With only CN¥4.88b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Hello Tech Energy .

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.