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.' 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. As with many other companies XtalPi Holdings Limited (HKG:2228) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is XtalPi Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that XtalPi Holdings had CN¥64.9m of debt in June 2024, down from CN¥9.36b, one year before. But on the other hand it also has CN¥3.39b in cash, leading to a CN¥3.32b net cash position.

A Look At XtalPi Holdings' Liabilities

The latest balance sheet data shows that XtalPi Holdings had liabilities of CN¥223.9m due within a year, and liabilities of CN¥97.2m falling due after that. Offsetting this, it had CN¥3.39b in cash and CN¥76.5m in receivables that were due within 12 months. So it actually has CN¥3.14b more liquid assets than total liabilities.

This excess liquidity suggests that XtalPi Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that XtalPi Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if XtalPi Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, XtalPi Holdings reported revenue of CN¥197m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is XtalPi Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months XtalPi Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥684m of cash and made a loss of CN¥2.5b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥3.32b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, XtalPi Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for XtalPi Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.