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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hongbo Co.,Ltd. (SZSE:002229) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is HongboLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 HongboLtd had CN¥452.6m of debt, an increase on CN¥395.0m, over one year. But on the other hand it also has CN¥738.2m in cash, leading to a CN¥285.6m net cash position.

How Strong Is HongboLtd's Balance Sheet?

We can see from the most recent balance sheet that HongboLtd had liabilities of CN¥1.42b falling due within a year, and liabilities of CN¥324.9m due beyond that. Offsetting these obligations, it had cash of CN¥738.2m as well as receivables valued at CN¥303.7m due within 12 months. So it has liabilities totalling CN¥700.5m more than its cash and near-term receivables, combined.

Since publicly traded HongboLtd shares are worth a total of CN¥6.96b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, HongboLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is HongboLtd'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.

In the last year HongboLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥631m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is HongboLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that HongboLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥281m of cash and made a loss of CN¥61m. But the saving grace is the CN¥285.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that HongboLtd is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.