David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Shandong Longda Meishi Co., Ltd. (SZSE:002726) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shandong Longda Meishi's Debt?

As you can see below, at the end of March 2024, Shandong Longda Meishi had CN¥3.04b of debt, up from CN¥2.64b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.09b, its net debt is less, at about CN¥1.95b.

How Healthy Is Shandong Longda Meishi's Balance Sheet?

The latest balance sheet data shows that Shandong Longda Meishi had liabilities of CN¥2.92b due within a year, and liabilities of CN¥1.39b falling due after that. Offsetting this, it had CN¥1.09b in cash and CN¥471.2m in receivables that were due within 12 months. So its liabilities total CN¥2.75b more than the combination of its cash and short-term receivables.

Shandong Longda Meishi has a market capitalization of CN¥7.46b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shandong Longda Meishi's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shandong Longda Meishi made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shandong Longda Meishi's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.1b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥926m of cash over the last year. So suffice it to say we consider the stock very risky. 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, we've discovered 1 warning sign for Shandong Longda Meishi that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.