Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hangzhou Shenhao Technology Co.,LTD. (SZSE:300853) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hangzhou Shenhao TechnologyLTD Carry?

As you can see below, at the end of September 2024, Hangzhou Shenhao TechnologyLTD had CN¥580.8m of debt, up from CN¥470.5m a year ago. Click the image for more detail. On the flip side, it has CN¥428.5m in cash leading to net debt of about CN¥152.3m.

How Healthy Is Hangzhou Shenhao TechnologyLTD's Balance Sheet?

We can see from the most recent balance sheet that Hangzhou Shenhao TechnologyLTD had liabilities of CN¥371.5m falling due within a year, and liabilities of CN¥502.7m due beyond that. Offsetting these obligations, it had cash of CN¥428.5m as well as receivables valued at CN¥462.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Hangzhou Shenhao TechnologyLTD's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hangzhou Shenhao TechnologyLTD'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, Hangzhou Shenhao TechnologyLTD made a loss at the EBIT level, and saw its revenue drop to CN¥155m, which is a fall of 67%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hangzhou Shenhao TechnologyLTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥272m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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. To that end, you should be aware of the 3 warning signs we've spotted with Hangzhou Shenhao TechnologyLTD .

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.