Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Ningbo Yunsheng Co., Ltd. (SHSE:600366) 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ningbo Yunsheng's Debt?

As you can see below, Ningbo Yunsheng had CN¥1.43b of debt at June 2024, down from CN¥1.93b a year prior. However, its balance sheet shows it holds CN¥1.60b in cash, so it actually has CN¥174.7m net cash.

A Look At Ningbo Yunsheng's Liabilities

Zooming in on the latest balance sheet data, we can see that Ningbo Yunsheng had liabilities of CN¥2.21b due within 12 months and liabilities of CN¥741.5m due beyond that. Offsetting this, it had CN¥1.60b in cash and CN¥2.26b in receivables that were due within 12 months. So it actually has CN¥914.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Ningbo Yunsheng could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ningbo Yunsheng has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ningbo Yunsheng 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 Ningbo Yunsheng had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥5.0b. We would much prefer see growth.

So How Risky Is Ningbo Yunsheng?

Although Ningbo Yunsheng had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥1.3b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Ningbo Yunsheng you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.