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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Zhejiang Zhongxin Fluoride Materials Co.,Ltd (SZSE:002915) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

How Much Debt Does Zhejiang Zhongxin Fluoride MaterialsLtd Carry?

As you can see below, at the end of June 2024, Zhejiang Zhongxin Fluoride MaterialsLtd had CN¥1.18b of debt, up from CN¥823.7m a year ago. Click the image for more detail. On the flip side, it has CN¥385.0m in cash leading to net debt of about CN¥797.5m.

How Healthy Is Zhejiang Zhongxin Fluoride MaterialsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Zhongxin Fluoride MaterialsLtd had liabilities of CN¥1.06b due within 12 months and liabilities of CN¥602.3m due beyond that. Offsetting this, it had CN¥385.0m in cash and CN¥270.9m in receivables that were due within 12 months. So its liabilities total CN¥1.01b more than the combination of its cash and short-term receivables.

Zhejiang Zhongxin Fluoride MaterialsLtd has a market capitalization of CN¥3.60b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Zhejiang Zhongxin Fluoride MaterialsLtd'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.

Over 12 months, Zhejiang Zhongxin Fluoride MaterialsLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Zhejiang Zhongxin Fluoride MaterialsLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥40m at the EBIT level. 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. Another cause for caution is that is bled CN¥255m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 1 warning sign for Zhejiang Zhongxin Fluoride MaterialsLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.