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.' 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, Zhuhai CosMX Battery Co., Ltd. (SHSE:688772) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

How Much Debt Does Zhuhai CosMX Battery Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhuhai CosMX Battery had CN¥7.12b of debt, an increase on CN¥6.63b, over one year. However, because it has a cash reserve of CN¥4.25b, its net debt is less, at about CN¥2.87b.

How Healthy Is Zhuhai CosMX Battery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhuhai CosMX Battery had liabilities of CN¥9.03b due within 12 months and liabilities of CN¥5.73b due beyond that. Offsetting these obligations, it had cash of CN¥4.25b as well as receivables valued at CN¥3.33b due within 12 months. So its liabilities total CN¥7.18b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Zhuhai CosMX Battery is worth CN¥18.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhuhai CosMX Battery 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.

In the last year Zhuhai CosMX Battery wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to CN¥11b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Zhuhai CosMX Battery had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥146m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of CN¥59m and a profit of CN¥323m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 warning signs for Zhuhai CosMX Battery (of which 1 is a bit unpleasant!) you should know about.

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.