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.' 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. As with many other companies Crystal Growth & Energy Equipment Co.,Ltd. (SHSE:688478) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

How Much Debt Does Crystal Growth & Energy EquipmentLtd Carry?

As you can see below, at the end of March 2024, Crystal Growth & Energy EquipmentLtd had CN¥11.7m of debt, up from CN¥7.02m a year ago. Click the image for more detail. However, it does have CN¥1.22b in cash offsetting this, leading to net cash of CN¥1.20b.

How Healthy Is Crystal Growth & Energy EquipmentLtd's Balance Sheet?

According to the last reported balance sheet, Crystal Growth & Energy EquipmentLtd had liabilities of CN¥485.3m due within 12 months, and liabilities of CN¥22.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.22b as well as receivables valued at CN¥221.1m due within 12 months. So it can boast CN¥928.9m more liquid assets than total liabilities.

This excess liquidity suggests that Crystal Growth & Energy EquipmentLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Crystal Growth & Energy EquipmentLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Crystal Growth & Energy EquipmentLtd has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. 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 Crystal Growth & Energy EquipmentLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Crystal Growth & Energy EquipmentLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Crystal Growth & Energy EquipmentLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Crystal Growth & Energy EquipmentLtd has CN¥1.20b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 94% over the last year. So we don't think Crystal Growth & Energy EquipmentLtd's use of debt is 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 instance, we've identified 2 warning signs for Crystal Growth & Energy EquipmentLtd (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.