Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Shanghai Trendzone Holdings Group Co.,Ltd (SHSE:603030) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shanghai Trendzone Holdings GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Trendzone Holdings GroupLtd had CN¥528.1m of debt in September 2024, down from CN¥642.9m, one year before. However, it also had CN¥132.3m in cash, and so its net debt is CN¥395.7m.

How Strong Is Shanghai Trendzone Holdings GroupLtd's Balance Sheet?

The latest balance sheet data shows that Shanghai Trendzone Holdings GroupLtd had liabilities of CN¥869.7m due within a year, and liabilities of CN¥401.0m falling due after that. Offsetting this, it had CN¥132.3m in cash and CN¥1.11b in receivables that were due within 12 months. So its liabilities total CN¥27.3m more than the combination of its cash and short-term receivables.

Having regard to Shanghai Trendzone Holdings GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.14b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Trendzone Holdings GroupLtd'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, Shanghai Trendzone Holdings GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥839m, which is a fall of 40%. That makes us nervous, to say the least.

Caveat Emptor

While Shanghai Trendzone Holdings GroupLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥280m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥267m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shanghai Trendzone Holdings GroupLtd 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.