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.' 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 note that Hainan Shennong Seed Industry Technology Co., Ltd. (SZSE:300189) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hainan Shennong Seed Industry Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Hainan Shennong Seed Industry Technology had debt of CN¥86.6m, up from CN¥8.14m in one year. But on the other hand it also has CN¥105.2m in cash, leading to a CN¥18.5m net cash position.

A Look At Hainan Shennong Seed Industry Technology's Liabilities

We can see from the most recent balance sheet that Hainan Shennong Seed Industry Technology had liabilities of CN¥105.7m falling due within a year, and liabilities of CN¥112.7m due beyond that. Offsetting these obligations, it had cash of CN¥105.2m as well as receivables valued at CN¥98.0m due within 12 months. So its liabilities total CN¥15.2m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Hainan Shennong Seed Industry Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.04b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Hainan Shennong Seed Industry Technology 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 it is Hainan Shennong Seed Industry Technology's earnings that will influence how the balance sheet holds up in the future. 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 Shennong Seed Industry Technology had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥173m. That's not what we would hope to see.

So How Risky Is Hainan Shennong Seed Industry Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Hainan Shennong Seed Industry Technology 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¥144m and booked a CN¥46m accounting loss. Given it only has net cash of CN¥18.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Hainan Shennong Seed Industry Technology (including 1 which makes us a bit uncomfortable) .

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.