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.' 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, Changzhou Tronly New Electronic Materials Co., Ltd. (SZSE:300429) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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.

How Much Debt Does Changzhou Tronly New Electronic Materials Carry?

The chart below, which you can click on for greater detail, shows that Changzhou Tronly New Electronic Materials had CN¥1.44b in debt in March 2024; about the same as the year before. However, it does have CN¥520.9m in cash offsetting this, leading to net debt of about CN¥914.2m.

A Look At Changzhou Tronly New Electronic Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Changzhou Tronly New Electronic Materials had liabilities of CN¥738.0m due within 12 months and liabilities of CN¥1.12b due beyond that. Offsetting these obligations, it had cash of CN¥520.9m as well as receivables valued at CN¥175.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.16b.

Of course, Changzhou Tronly New Electronic Materials has a market capitalization of CN¥6.20b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Changzhou Tronly New Electronic Materials 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 Changzhou Tronly New Electronic Materials wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to CN¥826m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Changzhou Tronly New Electronic Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥38m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥200m in negative free cash flow over the last twelve months. So to be blunt we think it 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. Case in point: We've spotted 3 warning signs for Changzhou Tronly New Electronic Materials 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com