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. We can see that Zhejiang Zhongke Magnetic Industry Co., Ltd. (SZSE:301141) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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.

What Is Zhejiang Zhongke Magnetic Industry's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Zhongke Magnetic Industry had debt of CN¥11.3m, up from CN¥4.89m in one year. However, its balance sheet shows it holds CN¥686.0m in cash, so it actually has CN¥674.7m net cash.

A Look At Zhejiang Zhongke Magnetic Industry's Liabilities

According to the last reported balance sheet, Zhejiang Zhongke Magnetic Industry had liabilities of CN¥177.8m due within 12 months, and liabilities of CN¥14.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥686.0m as well as receivables valued at CN¥246.8m due within 12 months. So it actually has CN¥740.2m more liquid assets than total liabilities.

It's good to see that Zhejiang Zhongke Magnetic Industry has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Zhejiang Zhongke Magnetic Industry has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhejiang Zhongke Magnetic Industry will need earnings to service that debt. 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.

Over 12 months, Zhejiang Zhongke Magnetic Industry made a loss at the EBIT level, and saw its revenue drop to CN¥487m, which is a fall of 2.1%. That's not what we would hope to see.

So How Risky Is Zhejiang Zhongke Magnetic Industry?

Although Zhejiang Zhongke Magnetic Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥28m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 5 warning signs for Zhejiang Zhongke Magnetic Industry you should be aware of, and 3 of them 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.