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.' 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 Financial Street Holdings Co., Ltd. (SZSE:000402) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Financial Street Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Financial Street Holdings had CN¥76.0b of debt in September 2023, down from CN¥81.1b, one year before. However, it also had CN¥18.3b in cash, and so its net debt is CN¥57.7b.

How Healthy Is Financial Street Holdings' Balance Sheet?

According to the last reported balance sheet, Financial Street Holdings had liabilities of CN¥38.7b due within 12 months, and liabilities of CN¥70.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥18.3b as well as receivables valued at CN¥7.82b due within 12 months. So it has liabilities totalling CN¥83.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥10.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Financial Street Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 Financial Street Holdings'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.

In the last year Financial Street Holdings had a loss before interest and tax, and actually shrunk its revenue by 56%, to CN¥13b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Financial Street Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥771m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥1.9b in the last year. So we think buying this stock is 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, we've discovered 1 warning sign for Financial Street Holdings that you should be aware of before investing here.

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.