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 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, Kunshan Kersen Science & Technology Co.,Ltd. (SHSE:603626) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Kunshan Kersen Science & TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Kunshan Kersen Science & TechnologyLtd had CN¥1.50b of debt, an increase on CN¥1.33b, over one year. However, it also had CN¥344.7m in cash, and so its net debt is CN¥1.16b.

How Healthy Is Kunshan Kersen Science & TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Kunshan Kersen Science & TechnologyLtd had liabilities of CN¥2.32b due within a year, and liabilities of CN¥780.6m falling due after that. Offsetting these obligations, it had cash of CN¥344.7m as well as receivables valued at CN¥1.44b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.32b.

While this might seem like a lot, it is not so bad since Kunshan Kersen Science & TechnologyLtd has a market capitalization of CN¥5.10b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kunshan Kersen Science & TechnologyLtd 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.

In the last year Kunshan Kersen Science & TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥3.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Kunshan Kersen Science & TechnologyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥286m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥3.2m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 4 warning signs for Kunshan Kersen Science & TechnologyLtd (of which 3 don't sit too well with us!) 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.