Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Aoyuan Beauty Valley Technology Co.,Ltd. (SZSE:000615) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Aoyuan Beauty Valley TechnologyLtd

How Much Debt Does Aoyuan Beauty Valley TechnologyLtd Carry?

As you can see below, Aoyuan Beauty Valley TechnologyLtd had CN¥1.22b of debt at September 2022, down from CN¥1.42b a year prior. However, because it has a cash reserve of CN¥331.6m, its net debt is less, at about CN¥885.2m.

A Look At Aoyuan Beauty Valley TechnologyLtd's Liabilities

According to the last reported balance sheet, Aoyuan Beauty Valley TechnologyLtd had liabilities of CN¥862.5m due within 12 months, and liabilities of CN¥1.25b due beyond 12 months. Offsetting this, it had CN¥331.6m in cash and CN¥261.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.52b.

Aoyuan Beauty Valley TechnologyLtd has a market capitalization of CN¥5.19b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Aoyuan Beauty Valley TechnologyLtd'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, Aoyuan Beauty Valley TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While Aoyuan Beauty Valley TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥216m. 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. However, it doesn't help that it burned through CN¥239m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Aoyuan Beauty Valley TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.