Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Changzhou Tiansheng New Materials Group Co., Ltd. (SZSE:300169) makes use of debt. 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 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 Changzhou Tiansheng New Materials Group Carry?

As you can see below, Changzhou Tiansheng New Materials Group had CN¥482.3m of debt at September 2024, down from CN¥538.0m a year prior. On the flip side, it has CN¥47.3m in cash leading to net debt of about CN¥435.0m.

How Healthy Is Changzhou Tiansheng New Materials Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Changzhou Tiansheng New Materials Group had liabilities of CN¥726.9m due within 12 months and liabilities of CN¥98.5m due beyond that. On the other hand, it had cash of CN¥47.3m and CN¥302.0m worth of receivables due within a year. So its liabilities total CN¥476.1m more than the combination of its cash and short-term receivables.

Of course, Changzhou Tiansheng New Materials Group has a market capitalization of CN¥3.62b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Changzhou Tiansheng New Materials Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Changzhou Tiansheng New Materials Group wasn't profitable at an EBIT level, but managed to grow its revenue by 9.3%, to CN¥586m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Changzhou Tiansheng New Materials Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥88m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥118m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Changzhou Tiansheng New Materials Group you should be aware of.

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.