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 Hainan Yedao (Group) Co.,Ltd (SHSE:600238) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Hainan Yedao (Group)Ltd Carry?

The chart below, which you can click on for greater detail, shows that Hainan Yedao (Group)Ltd had CN¥300.5m in debt in June 2024; about the same as the year before. On the flip side, it has CN¥20.8m in cash leading to net debt of about CN¥279.7m.

How Healthy Is Hainan Yedao (Group)Ltd's Balance Sheet?

According to the last reported balance sheet, Hainan Yedao (Group)Ltd had liabilities of CN¥491.6m due within 12 months, and liabilities of CN¥200.1m due beyond 12 months. Offsetting this, it had CN¥20.8m in cash and CN¥118.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥552.4m more than its cash and near-term receivables, combined.

Of course, Hainan Yedao (Group)Ltd has a market capitalization of CN¥3.56b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Hainan Yedao (Group)Ltd'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, Hainan Yedao (Group)Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥228m, which is a fall of 6.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hainan Yedao (Group)Ltd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥23m of cash over the last year. So to be blunt we think it is risky. 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 example - Hainan Yedao (Group)Ltd has 2 warning signs we think 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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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.