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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zhejiang Wazam New Materials Co.,LTD. (SHSE:603186) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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 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 Zhejiang Wazam New MaterialsLTD

What Is Zhejiang Wazam New MaterialsLTD's Net Debt?

As you can see below, at the end of September 2023, Zhejiang Wazam New MaterialsLTD had CN¥2.19b of debt, up from CN¥1.78b a year ago. Click the image for more detail. However, it also had CN¥584.3m in cash, and so its net debt is CN¥1.60b.

A Look At Zhejiang Wazam New MaterialsLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Wazam New MaterialsLTD had liabilities of CN¥2.86b due within 12 months and liabilities of CN¥1.44b due beyond that. On the other hand, it had cash of CN¥584.3m and CN¥1.69b worth of receivables due within a year. So it has liabilities totalling CN¥2.02b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Zhejiang Wazam New MaterialsLTD has a market capitalization of CN¥5.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang Wazam New MaterialsLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Zhejiang Wazam New MaterialsLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to CN¥3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Zhejiang Wazam New MaterialsLTD produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥79m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥308m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhejiang Wazam New MaterialsLTD (of which 1 makes us a bit uncomfortable!) you should know about.

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.