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. Importantly, Jiangsu Huahong Technology Co., Ltd. (SZSE:002645) does carry debt. But is this debt a concern to shareholders?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Huahong Technology's Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu Huahong Technology had CN¥1.12b in debt in September 2024; about the same as the year before. However, it does have CN¥744.3m in cash offsetting this, leading to net debt of about CN¥372.6m.

How Strong Is Jiangsu Huahong Technology's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Huahong Technology had liabilities of CN¥1.67b falling due within a year, and liabilities of CN¥708.2m due beyond that. On the other hand, it had cash of CN¥744.3m and CN¥825.8m worth of receivables due within a year. So its liabilities total CN¥812.0m more than the combination of its cash and short-term receivables.

Given Jiangsu Huahong Technology has a market capitalization of CN¥4.29b, it's hard to believe these liabilities pose much 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 it is future earnings, more than anything, that will determine Jiangsu Huahong Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jiangsu Huahong Technology made a loss at the EBIT level, and saw its revenue drop to CN¥5.6b, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jiangsu Huahong Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥130m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥104m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 Jiangsu Huahong Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.