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. We note that Hongbo Co.,Ltd. (SZSE:002229) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is HongboLtd's Net Debt?

The image below, which you can click on for greater detail, shows that HongboLtd had debt of CN¥452.6m at the end of March 2024, a reduction from CN¥493.6m over a year. However, its balance sheet shows it holds CN¥738.2m in cash, so it actually has CN¥285.6m net cash.

How Strong Is HongboLtd's Balance Sheet?

According to the last reported balance sheet, HongboLtd had liabilities of CN¥1.42b due within 12 months, and liabilities of CN¥324.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥738.2m as well as receivables valued at CN¥303.7m due within 12 months. So its liabilities total CN¥700.5m more than the combination of its cash and short-term receivables.

Of course, HongboLtd has a market capitalization of CN¥4.42b, 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. Despite its noteworthy liabilities, HongboLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is HongboLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, HongboLtd made a loss at the EBIT level, and saw its revenue drop to CN¥593m, which is a fall of 2.1%. That's not what we would hope to see.

So How Risky Is HongboLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months HongboLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥199m and booked a CN¥62m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥285.6m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with HongboLtd (including 1 which is significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.