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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Heilongjiang Interchina Water Treatment Co.,Ltd (SHSE:600187) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is Heilongjiang Interchina Water TreatmentLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Heilongjiang Interchina Water TreatmentLtd had debt of CN¥115.3m at the end of September 2024, a reduction from CN¥152.6m over a year. However, it does have CN¥327.8m in cash offsetting this, leading to net cash of CN¥212.5m.

A Look At Heilongjiang Interchina Water TreatmentLtd's Liabilities

According to the last reported balance sheet, Heilongjiang Interchina Water TreatmentLtd had liabilities of CN¥179.2m due within 12 months, and liabilities of CN¥205.5m due beyond 12 months. Offsetting this, it had CN¥327.8m in cash and CN¥459.7m in receivables that were due within 12 months. So it actually has CN¥402.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Heilongjiang Interchina Water TreatmentLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Heilongjiang Interchina Water TreatmentLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Heilongjiang Interchina Water TreatmentLtd 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.

Over 12 months, Heilongjiang Interchina Water TreatmentLtd made a loss at the EBIT level, and saw its revenue drop to CN¥172m, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Heilongjiang Interchina Water TreatmentLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Heilongjiang Interchina Water TreatmentLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥101m of cash and made a loss of CN¥28m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥212.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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 Heilongjiang Interchina Water TreatmentLtd is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.