The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Guangzhou Pearl River Piano Group Co.,Ltd (SZSE:002678) makes use of 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Guangzhou Pearl River Piano GroupLtd

How Much Debt Does Guangzhou Pearl River Piano GroupLtd Carry?

The image below, which you can click on for greater detail, shows that Guangzhou Pearl River Piano GroupLtd had debt of CN¥418.5m at the end of September 2023, a reduction from CN¥550.9m over a year. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.12b.

How Healthy Is Guangzhou Pearl River Piano GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangzhou Pearl River Piano GroupLtd had liabilities of CN¥945.5m falling due within a year, and liabilities of CN¥115.5m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥277.8m in receivables that were due within 12 months. So it can boast CN¥750.8m more liquid assets than total liabilities.

This surplus suggests that Guangzhou Pearl River Piano GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangzhou Pearl River Piano GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangzhou Pearl River Piano GroupLtd 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.

Over 12 months, Guangzhou Pearl River Piano GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 27%. That makes us nervous, to say the least.

So How Risky Is Guangzhou Pearl River Piano GroupLtd?

While Guangzhou Pearl River Piano GroupLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥29m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 3 warning signs we've spotted with Guangzhou Pearl River Piano GroupLtd (including 1 which can't be ignored) .

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.