Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Changzhou Nrb Corporation (SZSE:002708) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Changzhou Nrb Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Changzhou Nrb had CN¥726.8m of debt, an increase on CN¥675.1m, over one year. However, because it has a cash reserve of CN¥532.2m, its net debt is less, at about CN¥194.6m.

How Strong Is Changzhou Nrb's Balance Sheet?

We can see from the most recent balance sheet that Changzhou Nrb had liabilities of CN¥1.45b falling due within a year, and liabilities of CN¥104.2m due beyond that. Offsetting this, it had CN¥532.2m in cash and CN¥873.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥149.0m.

Since publicly traded Changzhou Nrb shares are worth a total of CN¥4.59b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Changzhou Nrb will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Changzhou Nrb wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CN¥2.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Changzhou Nrb still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥50m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥121m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Changzhou Nrb you should be aware of, and 1 of them is a bit concerning.

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.