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 Shuangliang Eco-Energy Systems Co.,Ltd (SHSE:600481) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shuangliang Eco-Energy SystemsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Shuangliang Eco-Energy SystemsLtd had CN¥11.5b of debt, an increase on CN¥5.81b, over one year. However, it does have CN¥6.83b in cash offsetting this, leading to net debt of about CN¥4.66b.

How Healthy Is Shuangliang Eco-Energy SystemsLtd's Balance Sheet?

The latest balance sheet data shows that Shuangliang Eco-Energy SystemsLtd had liabilities of CN¥19.4b due within a year, and liabilities of CN¥5.37b falling due after that. Offsetting this, it had CN¥6.83b in cash and CN¥2.69b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥15.2b.

This deficit casts a shadow over the CN¥7.00b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Shuangliang Eco-Energy SystemsLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shuangliang Eco-Energy SystemsLtd can strengthen its balance sheet over time. 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 Shuangliang Eco-Energy SystemsLtd had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥18b. That's not what we would hope to see.

Caveat Emptor

While Shuangliang Eco-Energy SystemsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥385m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥2.2b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for Shuangliang Eco-Energy SystemsLtd you should be aware of.

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.