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, Tianshui Huatian Technology Co., Ltd. (SZSE:002185) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Tianshui Huatian Technology's Net Debt?

As you can see below, at the end of March 2024, Tianshui Huatian Technology had CN¥12.0b of debt, up from CN¥7.66b a year ago. Click the image for more detail. On the flip side, it has CN¥8.14b in cash leading to net debt of about CN¥3.86b.

A Look At Tianshui Huatian Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Tianshui Huatian Technology had liabilities of CN¥11.1b due within 12 months and liabilities of CN¥5.75b due beyond that. Offsetting this, it had CN¥8.14b in cash and CN¥2.29b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.37b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tianshui Huatian Technology is worth CN¥26.2b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tianshui Huatian Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Tianshui Huatian Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to CN¥12b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Tianshui Huatian Technology produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥221m. 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. Another cause for caution is that is bled CN¥1.2b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with Tianshui Huatian Technology , and understanding them should be part of your investment process.

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.