Warren Buffett famously said, '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 Hunan Friendship&Apollo Commercial Co.,Ltd. (SZSE:002277) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Hunan Friendship&Apollo CommercialLtd's Debt?

The chart below, which you can click on for greater detail, shows that Hunan Friendship&Apollo CommercialLtd had CN¥4.20b in debt in June 2024; about the same as the year before. However, it does have CN¥322.7m in cash offsetting this, leading to net debt of about CN¥3.88b.

How Healthy Is Hunan Friendship&Apollo CommercialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hunan Friendship&Apollo CommercialLtd had liabilities of CN¥5.28b due within 12 months and liabilities of CN¥2.75b due beyond that. Offsetting these obligations, it had cash of CN¥322.7m as well as receivables valued at CN¥470.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥7.24b.

The deficiency here weighs heavily on the CN¥3.97b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Hunan Friendship&Apollo CommercialLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hunan Friendship&Apollo CommercialLtd'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 Hunan Friendship&Apollo CommercialLtd had a loss before interest and tax, and actually shrunk its revenue by 10.0%, to CN¥1.3b. We would much prefer see growth.

Caveat Emptor

Importantly, Hunan Friendship&Apollo CommercialLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥92m at the EBIT level. 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. But on the bright side the company actually produced a statutory profit of CN¥63m and free cash flow of CN¥358m. So there is definitely a chance that it can improve things in the next few years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hunan Friendship&Apollo CommercialLtd is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.