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 note that Shenyang Blue Silver Industry Automation Equipment Co., Ltd (SZSE:300293) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenyang Blue Silver Industry Automation Equipment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenyang Blue Silver Industry Automation Equipment had CN¥466.2m of debt in September 2024, down from CN¥521.3m, one year before. However, because it has a cash reserve of CN¥132.4m, its net debt is less, at about CN¥333.8m.

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¥776.0m due within 12 months, and liabilities of CN¥351.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥132.4m as well as receivables valued at CN¥493.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥500.9m.

Given Shenyang Blue Silver Industry Automation Equipment has a market capitalization of CN¥9.78b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenyang Blue Silver Industry Automation Equipment'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.

Over 12 months, Shenyang Blue Silver Industry Automation Equipment made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Shenyang Blue Silver Industry Automation Equipment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥7.4m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥19m. So to be blunt we do think it is risky. 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 Shenyang Blue Silver Industry Automation Equipment is showing 1 warning sign in our investment analysis , you should know about...

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.