Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hainan Development HoldingsNanhai Co., Ltd. (SZSE:002163) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Hainan Development HoldingsNanhai's Net Debt?

As you can see below, Hainan Development HoldingsNanhai had CN¥596.2m of debt at June 2024, down from CN¥653.2m a year prior. However, it does have CN¥797.0m in cash offsetting this, leading to net cash of CN¥200.7m.

How Strong Is Hainan Development HoldingsNanhai's Balance Sheet?

We can see from the most recent balance sheet that Hainan Development HoldingsNanhai had liabilities of CN¥3.57b falling due within a year, and liabilities of CN¥1.02b due beyond that. Offsetting this, it had CN¥797.0m in cash and CN¥2.35b in receivables that were due within 12 months. So its liabilities total CN¥1.44b more than the combination of its cash and short-term receivables.

Hainan Development HoldingsNanhai has a market capitalization of CN¥5.23b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Hainan Development HoldingsNanhai boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hainan Development HoldingsNanhai'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.

In the last year Hainan Development HoldingsNanhai wasn't profitable at an EBIT level, but managed to grow its revenue by 8.6%, to CN¥4.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Hainan Development HoldingsNanhai?

While Hainan Development HoldingsNanhai lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥93m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Hainan Development HoldingsNanhai that you should be aware of.

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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