The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CNNC Hua Yuan Titanium Dioxide Co., Ltd (SZSE:002145) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 CNNC Hua Yuan Titanium Dioxide's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 CNNC Hua Yuan Titanium Dioxide had debt of CN¥3.90b, up from CN¥2.88b in one year. However, its balance sheet shows it holds CN¥7.06b in cash, so it actually has CN¥3.16b net cash.

How Healthy Is CNNC Hua Yuan Titanium Dioxide's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CNNC Hua Yuan Titanium Dioxide had liabilities of CN¥5.69b due within 12 months and liabilities of CN¥1.37b due beyond that. Offsetting this, it had CN¥7.06b in cash and CN¥1.30b in receivables that were due within 12 months. So it can boast CN¥1.30b more liquid assets than total liabilities.

This short term liquidity is a sign that CNNC Hua Yuan Titanium Dioxide could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CNNC Hua Yuan Titanium Dioxide boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, CNNC Hua Yuan Titanium Dioxide grew its EBIT by 359% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CNNC Hua Yuan Titanium Dioxide will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CNNC Hua Yuan Titanium Dioxide has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, CNNC Hua Yuan Titanium Dioxide saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case CNNC Hua Yuan Titanium Dioxide has CN¥3.16b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 359% over the last year. So we don't have any problem with CNNC Hua Yuan Titanium Dioxide's use of debt. 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. For instance, we've identified 2 warning signs for CNNC Hua Yuan Titanium Dioxide (1 is significant) you should be aware of.

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.