Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hunan Baili Engineering Sci&Tech Co.,Ltd (SHSE:603959) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hunan Baili Engineering Sci&TechLtd

What Is Hunan Baili Engineering Sci&TechLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Hunan Baili Engineering Sci&TechLtd had debt of CN¥655.2m, up from CN¥535.2m in one year. However, it also had CN¥488.5m in cash, and so its net debt is CN¥166.7m.

How Healthy Is Hunan Baili Engineering Sci&TechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Baili Engineering Sci&TechLtd had liabilities of CN¥3.62b due within 12 months and liabilities of CN¥23.7m due beyond that. On the other hand, it had cash of CN¥488.5m and CN¥1.87b worth of receivables due within a year. So it has liabilities totalling CN¥1.28b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hunan Baili Engineering Sci&TechLtd is worth CN¥3.89b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 it is Hunan Baili Engineering Sci&TechLtd's earnings that will influence how the balance sheet holds up in the future. 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, Hunan Baili Engineering Sci&TechLtd reported revenue of CN¥2.9b, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Hunan Baili Engineering Sci&TechLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at CN¥158m. 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¥286m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Hunan Baili Engineering Sci&TechLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.