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.' 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 can see that Kale Environment Technology (Shanghai) Co., Ltd. (SZSE:301070) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Kale Environment Technology (Shanghai)'s Debt?

The image below, which you can click on for greater detail, shows that Kale Environment Technology (Shanghai) had debt of CN¥47.6m at the end of September 2024, a reduction from CN¥74.5m over a year. However, its balance sheet shows it holds CN¥396.0m in cash, so it actually has CN¥348.4m net cash.

How Healthy Is Kale Environment Technology (Shanghai)'s Balance Sheet?

According to the last reported balance sheet, Kale Environment Technology (Shanghai) had liabilities of CN¥149.9m due within 12 months, and liabilities of CN¥53.1m due beyond 12 months. Offsetting this, it had CN¥396.0m in cash and CN¥104.5m in receivables that were due within 12 months. So it can boast CN¥297.5m more liquid assets than total liabilities.

This surplus suggests that Kale Environment Technology (Shanghai) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Kale Environment Technology (Shanghai) 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 you can't view debt in total isolation; since Kale Environment Technology (Shanghai) 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 Kale Environment Technology (Shanghai) had a loss before interest and tax, and actually shrunk its revenue by 2.4%, to CN¥343m. We would much prefer see growth.

So How Risky Is Kale Environment Technology (Shanghai)?

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 Kale Environment Technology (Shanghai) 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¥40m and booked a CN¥7.1m accounting loss. With only CN¥348.4m 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kale Environment Technology (Shanghai) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.