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 Shijiazhuang ChangShan BeiMing Technology Co.,Ltd (SZSE:000158) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shijiazhuang ChangShan BeiMing TechnologyLtd

What Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Net Debt?

As you can see below, Shijiazhuang ChangShan BeiMing TechnologyLtd had CN¥5.39b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.37b in cash, and so its net debt is CN¥4.02b.

How Healthy Is Shijiazhuang ChangShan BeiMing TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Shijiazhuang ChangShan BeiMing TechnologyLtd had liabilities of CN¥8.00b falling due within a year, and liabilities of CN¥1.32b due beyond that. On the other hand, it had cash of CN¥1.37b and CN¥3.37b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.58b.

Shijiazhuang ChangShan BeiMing TechnologyLtd has a market capitalization of CN¥17.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shijiazhuang ChangShan BeiMing TechnologyLtd 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 Shijiazhuang ChangShan BeiMing TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥8.5b. We would much prefer see growth.

Caveat Emptor

While Shijiazhuang ChangShan BeiMing 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¥658m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥202m into a profit. So we do think this stock is quite 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. For example - Shijiazhuang ChangShan BeiMing TechnologyLtd has 3 warning signs we think you should be aware of.

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.