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.' 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. Importantly, GuangDong SongYang Recycle Resources CO.,LTD (SHSE:603863) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is GuangDong SongYang Recycle ResourcesLTD's Debt?

As you can see below, at the end of September 2024, GuangDong SongYang Recycle ResourcesLTD had CN¥558.0m of debt, up from CN¥521.1m a year ago. Click the image for more detail. However, it does have CN¥47.2m in cash offsetting this, leading to net debt of about CN¥510.8m.

A Look At GuangDong SongYang Recycle ResourcesLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that GuangDong SongYang Recycle ResourcesLTD had liabilities of CN¥695.0m due within 12 months and liabilities of CN¥118.8m due beyond that. On the other hand, it had cash of CN¥47.2m and CN¥41.9m worth of receivables due within a year. So its liabilities total CN¥724.6m more than the combination of its cash and short-term receivables.

Since publicly traded GuangDong SongYang Recycle ResourcesLTD shares are worth a total of CN¥5.79b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GuangDong SongYang Recycle ResourcesLTD'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.

Over 12 months, GuangDong SongYang Recycle ResourcesLTD reported revenue of CN¥733m, which is a gain of 8.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, GuangDong SongYang Recycle ResourcesLTD had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥118m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥49m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GuangDong SongYang Recycle ResourcesLTD is showing 2 warning signs in our investment analysis , you should know about...

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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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.