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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Harbin Dongan Auto Engine Co.,Ltd (SHSE:600178) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Harbin Dongan Auto EngineLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Harbin Dongan Auto EngineLtd had CN¥340.2m of debt, an increase on CN¥40.0m, over one year. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥984.4m.

How Strong Is Harbin Dongan Auto EngineLtd's Balance Sheet?

We can see from the most recent balance sheet that Harbin Dongan Auto EngineLtd had liabilities of CN¥4.21b falling due within a year, and liabilities of CN¥118.3m due beyond that. Offsetting this, it had CN¥1.32b in cash and CN¥2.12b in receivables that were due within 12 months. So its liabilities total CN¥883.5m more than the combination of its cash and short-term receivables.

Since publicly traded Harbin Dongan Auto EngineLtd shares are worth a total of CN¥5.97b, 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. Despite its noteworthy liabilities, Harbin Dongan Auto EngineLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Harbin Dongan Auto EngineLtd'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.

Over 12 months, Harbin Dongan Auto EngineLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.9b, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is Harbin Dongan Auto EngineLtd?

While Harbin Dongan Auto EngineLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥31m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example Harbin Dongan Auto EngineLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.