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 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. Importantly, Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shenyang Blue Silver Industry Automation Equipment Carry?

As you can see below, Shenyang Blue Silver Industry Automation Equipment had CN¥351.4m of debt at March 2024, down from CN¥375.8m a year prior. However, because it has a cash reserve of CN¥133.6m, its net debt is less, at about CN¥217.7m.

How Strong Is Shenyang Blue Silver Industry Automation Equipment's Balance Sheet?

According to the last reported balance sheet, Shenyang Blue Silver Industry Automation Equipment had liabilities of CN¥805.0m due within 12 months, and liabilities of CN¥362.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥133.6m as well as receivables valued at CN¥462.2m due within 12 months. So its liabilities total CN¥572.0m more than the combination of its cash and short-term receivables.

Given Shenyang Blue Silver Industry Automation Equipment has a market capitalization of CN¥5.01b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Shenyang Blue Silver Industry Automation Equipment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shenyang Blue Silver Industry Automation Equipment reported revenue of CN¥1.4b, which is a gain of 11%, although it did not report any earnings before interest and tax. 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 Shenyang Blue Silver Industry Automation Equipment produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥24m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥33m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Shenyang Blue Silver Industry Automation Equipment .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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