The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Crystal Clear Electronic Material Co.,Ltd (SZSE:300655) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Crystal Clear Electronic MaterialLtd's Debt?

As you can see below, at the end of March 2024, Crystal Clear Electronic MaterialLtd had CN¥1.09b of debt, up from CN¥912.4m a year ago. Click the image for more detail. However, it does have CN¥1.87b in cash offsetting this, leading to net cash of CN¥782.5m.

A Look At Crystal Clear Electronic MaterialLtd's Liabilities

We can see from the most recent balance sheet that Crystal Clear Electronic MaterialLtd had liabilities of CN¥676.9m falling due within a year, and liabilities of CN¥1.01b due beyond that. Offsetting this, it had CN¥1.87b in cash and CN¥551.9m in receivables that were due within 12 months. So it can boast CN¥742.0m more liquid assets than total liabilities.

This surplus suggests that Crystal Clear Electronic MaterialLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Crystal Clear Electronic MaterialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Crystal Clear Electronic MaterialLtd's EBIT was down 45% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Crystal Clear Electronic MaterialLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Crystal Clear Electronic MaterialLtd 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 Clear Electronic MaterialLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Crystal Clear Electronic MaterialLtd has CN¥782.5m in net cash and a decent-looking balance sheet. Despite its cash we think that Crystal Clear Electronic MaterialLtd seems to struggle to grow its EBIT, so we are wary of the stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Crystal Clear Electronic MaterialLtd , 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.

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