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.' 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 note that Zhonglu.Co.,Ltd (SHSE:900915) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhonglu.Co.Ltd

What Is Zhonglu.Co.Ltd's Debt?

As you can see below, Zhonglu.Co.Ltd had CN¥54.1m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥247.6m in cash offsetting this, leading to net cash of CN¥193.5m.

How Strong Is Zhonglu.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Zhonglu.Co.Ltd had liabilities of CN¥255.0m due within 12 months, and liabilities of CN¥96.3m due beyond 12 months. Offsetting this, it had CN¥247.6m in cash and CN¥87.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥16.3m more than its cash and near-term receivables, combined.

Having regard to Zhonglu.Co.Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Zhonglu.Co.Ltd also has more cash than debt, so we're pretty confident 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 Zhonglu.Co.Ltd 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 Zhonglu.Co.Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥878m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhonglu.Co.Ltd?

While Zhonglu.Co.Ltd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥40m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that Zhonglu.Co.Ltd is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Zhonglu.Co.Ltd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.