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, Zhong Fu Tong Group Co., Ltd. (SZSE:300560) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Zhong Fu Tong Group's Net Debt?

As you can see below, Zhong Fu Tong Group had CN¥723.6m of debt at September 2024, down from CN¥769.7m a year prior. However, because it has a cash reserve of CN¥711.0m, its net debt is less, at about CN¥12.6m.

How Strong Is Zhong Fu Tong Group's Balance Sheet?

According to the last reported balance sheet, Zhong Fu Tong Group had liabilities of CN¥1.52b due within 12 months, and liabilities of CN¥193.5m due beyond 12 months. Offsetting this, it had CN¥711.0m in cash and CN¥1.26b in receivables that were due within 12 months. So it can boast CN¥260.6m more liquid assets than total liabilities.

This surplus suggests that Zhong Fu Tong Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. But either way, Zhong Fu Tong Group has virtually no net debt, 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 Zhong Fu Tong Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhong Fu Tong Group had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥1.2b. That's not what we would hope to see.

Caveat Emptor

While Zhong Fu Tong Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥22m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zhong Fu Tong Group is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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