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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies China National Complete Plant Import & Export Corporation Limited (SZSE:000151) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China National Complete Plant Import & Export's Debt?

The image below, which you can click on for greater detail, shows that China National Complete Plant Import & Export had debt of CN¥720.8m at the end of September 2024, a reduction from CN¥934.4m over a year. However, it does have CN¥1.09b in cash offsetting this, leading to net cash of CN¥365.4m.

A Look At China National Complete Plant Import & Export's Liabilities

According to the last reported balance sheet, China National Complete Plant Import & Export had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥95.1m due beyond 12 months. On the other hand, it had cash of CN¥1.09b and CN¥731.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥276.9m.

Given China National Complete Plant Import & Export has a market capitalization of CN¥5.34b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, China National Complete Plant Import & Export boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China National Complete Plant Import & Export will need earnings to service that debt. 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.

In the last year China National Complete Plant Import & Export had a loss before interest and tax, and actually shrunk its revenue by 60%, to CN¥1.7b. To be frank that doesn't bode well.

So How Risky Is China National Complete Plant Import & Export?

While China National Complete Plant Import & Export lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥314m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 1 warning sign for China National Complete Plant Import & Export that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.