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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Shenzhen Strongteam Decoration Engineering Co., Ltd. (SZSE:002989) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

How Much Debt Does Shenzhen Strongteam Decoration Engineering Carry?

As you can see below, Shenzhen Strongteam Decoration Engineering had CN¥546.1m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥816.4m in cash offsetting this, leading to net cash of CN¥270.3m.

A Look At Shenzhen Strongteam Decoration Engineering's Liabilities

According to the last reported balance sheet, Shenzhen Strongteam Decoration Engineering had liabilities of CN¥491.8m due within 12 months, and liabilities of CN¥545.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥816.4m as well as receivables valued at CN¥847.7m due within 12 months. So it actually has CN¥626.3m more liquid assets than total liabilities.

This excess liquidity suggests that Shenzhen Strongteam Decoration Engineering is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shenzhen Strongteam Decoration Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Strongteam Decoration Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Strongteam Decoration Engineering had a loss before interest and tax, and actually shrunk its revenue by 63%, to CN¥424m. That makes us nervous, to say the least.

So How Risky Is Shenzhen Strongteam Decoration Engineering?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Shenzhen Strongteam Decoration Engineering lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥181m and booked a CN¥141m accounting loss. With only CN¥270.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Strongteam Decoration Engineering .

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.