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.' 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 can see that China Spacesat Co.,Ltd. (SHSE:600118) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is China SpacesatLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 China SpacesatLtd had CN¥326.9m of debt, an increase on CN¥187.4m, over one year. However, its balance sheet shows it holds CN¥1.53b in cash, so it actually has CN¥1.20b net cash.

How Healthy Is China SpacesatLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China SpacesatLtd had liabilities of CN¥5.01b due within 12 months and liabilities of CN¥432.3m due beyond that. On the other hand, it had cash of CN¥1.53b and CN¥5.33b worth of receivables due within a year. So it actually has CN¥1.42b more liquid assets than total liabilities.

This short term liquidity is a sign that China SpacesatLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China SpacesatLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China SpacesatLtd 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 China SpacesatLtd had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥4.9b. To be frank that doesn't bode well.

So How Risky Is China SpacesatLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year China SpacesatLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥23m accounting loss. With only CN¥1.20b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like China SpacesatLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.