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 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. Importantly, Hainan RuiZe New Building Material Co.,Ltd (SZSE:002596) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Hainan RuiZe New Building MaterialLtd Carry?

As you can see below, Hainan RuiZe New Building MaterialLtd had CN¥1.32b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥129.8m in cash leading to net debt of about CN¥1.19b.

How Strong Is Hainan RuiZe New Building MaterialLtd's Balance Sheet?

According to the last reported balance sheet, Hainan RuiZe New Building MaterialLtd had liabilities of CN¥1.57b due within 12 months, and liabilities of CN¥1.18b due beyond 12 months. On the other hand, it had cash of CN¥129.8m and CN¥2.43b worth of receivables due within a year. So its liabilities total CN¥191.9m more than the combination of its cash and short-term receivables.

Of course, Hainan RuiZe New Building MaterialLtd has a market capitalization of CN¥3.61b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hainan RuiZe New Building MaterialLtd 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.

In the last year Hainan RuiZe New Building MaterialLtd had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.5b. We would much prefer see growth.

Caveat Emptor

While Hainan RuiZe New Building MaterialLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥102m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥490m. So we do think this stock is quite risky. 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. Be aware that Hainan RuiZe New Building MaterialLtd is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.