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. Importantly, China Harzone Industry Corp., Ltd (SZSE:300527) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does China Harzone Industry Carry?

The image below, which you can click on for greater detail, shows that at September 2023 China Harzone Industry had debt of CN¥329.1m, up from CN¥312.4m in one year. However, its balance sheet shows it holds CN¥1.26b in cash, so it actually has CN¥931.0m net cash.

A Look At China Harzone Industry's Liabilities

According to the last reported balance sheet, China Harzone Industry had liabilities of CN¥634.0m due within 12 months, and liabilities of CN¥424.5m due beyond 12 months. On the other hand, it had cash of CN¥1.26b and CN¥721.8m worth of receivables due within a year. So it actually has CN¥923.5m more liquid assets than total liabilities.

This surplus suggests that China Harzone Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Harzone Industry has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Harzone Industry 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, China Harzone Industry made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is China Harzone Industry?

While China Harzone Industry lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥9.7m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 - China Harzone Industry has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.