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.' 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. We note that Shanghai Kinlita Chemical Co., Ltd. (SZSE:300225) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Shanghai Kinlita Chemical

What Is Shanghai Kinlita Chemical's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Shanghai Kinlita Chemical had debt of CN¥89.0m, up from none in one year. On the flip side, it has CN¥74.4m in cash leading to net debt of about CN¥14.6m.

How Healthy Is Shanghai Kinlita Chemical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Kinlita Chemical had liabilities of CN¥382.9m due within 12 months and liabilities of CN¥12.8m due beyond that. On the other hand, it had cash of CN¥74.4m and CN¥529.1m worth of receivables due within a year. So it can boast CN¥207.9m more liquid assets than total liabilities.

This surplus suggests that Shanghai Kinlita Chemical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, Shanghai Kinlita Chemical has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 Shanghai Kinlita Chemical will need earnings to service that debt. 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, Shanghai Kinlita Chemical saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Shanghai Kinlita Chemical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥63m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shanghai Kinlita Chemical is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.