The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Business-intelligence of Oriental Nations Corporation Ltd. (SZSE:300166) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Business-intelligence of Oriental Nations Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Business-intelligence of Oriental Nations had CN¥893.5m of debt, an increase on CN¥751.9m, over one year. On the flip side, it has CN¥676.7m in cash leading to net debt of about CN¥216.7m.

How Strong Is Business-intelligence of Oriental Nations' Balance Sheet?

The latest balance sheet data shows that Business-intelligence of Oriental Nations had liabilities of CN¥1.20b due within a year, and liabilities of CN¥444.8m falling due after that. Offsetting these obligations, it had cash of CN¥676.7m as well as receivables valued at CN¥2.05b due within 12 months. So it actually has CN¥1.08b more liquid assets than total liabilities.

This surplus suggests that Business-intelligence of Oriental Nations has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Business-intelligence of Oriental Nations can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Business-intelligence of Oriental Nations wasn't profitable at an EBIT level, but managed to grow its revenue by 3.9%, to CN¥2.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Business-intelligence of Oriental Nations produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥404m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Business-intelligence of Oriental Nations's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com