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.' 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. Importantly, Guangdong Champion Asia Electronics Co.,Ltd. (SHSE:603386) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Guangdong Champion Asia ElectronicsLtd's Debt?

The chart below, which you can click on for greater detail, shows that Guangdong Champion Asia ElectronicsLtd had CN¥911.2m in debt in September 2024; about the same as the year before. However, it also had CN¥58.5m in cash, and so its net debt is CN¥852.6m.

A Look At Guangdong Champion Asia ElectronicsLtd's Liabilities

According to the last reported balance sheet, Guangdong Champion Asia ElectronicsLtd had liabilities of CN¥1.70b due within 12 months, and liabilities of CN¥295.3m due beyond 12 months. Offsetting this, it had CN¥58.5m in cash and CN¥739.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.

Guangdong Champion Asia ElectronicsLtd has a market capitalization of CN¥4.45b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangdong Champion Asia ElectronicsLtd 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.

Over 12 months, Guangdong Champion Asia ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.3b, which is a fall of 7.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Guangdong Champion Asia ElectronicsLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥40m 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. For example, we would not want to see a repeat of last year's loss of CN¥29m. So to be blunt we do 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. Be aware that Guangdong Champion Asia ElectronicsLtd is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.