Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Xiamen Xindeco Ltd. (SZSE:000701) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Xiamen Xindeco's Debt?

As you can see below, Xiamen Xindeco had CN¥9.54b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥3.17b in cash offsetting this, leading to net debt of about CN¥6.37b.

A Look At Xiamen Xindeco's Liabilities

According to the last reported balance sheet, Xiamen Xindeco had liabilities of CN¥13.3b due within 12 months, and liabilities of CN¥2.13b due beyond 12 months. On the other hand, it had cash of CN¥3.17b and CN¥3.20b worth of receivables due within a year. So its liabilities total CN¥9.06b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥3.77b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Xiamen Xindeco would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xiamen Xindeco's earnings that will influence how the balance sheet holds up in the future. 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, Xiamen Xindeco made a loss at the EBIT level, and saw its revenue drop to CN¥50b, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Xiamen Xindeco's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥273m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥759m. And until that time we think this is a risky stock. For riskier companies like Xiamen Xindeco I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.