David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that CSSC Science& Technology Co., Ltd (SHSE:600072) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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.

How Much Debt Does CSSC Science& Technology Carry?

As you can see below, at the end of September 2024, CSSC Science& Technology had CN¥22.1b of debt, up from CN¥17.6b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥7.31b, its net debt is less, at about CN¥14.8b.

How Healthy Is CSSC Science& Technology's Balance Sheet?

According to the last reported balance sheet, CSSC Science& Technology had liabilities of CN¥16.6b due within 12 months, and liabilities of CN¥21.4b due beyond 12 months. Offsetting these obligations, it had cash of CN¥7.31b as well as receivables valued at CN¥13.2b due within 12 months. So it has liabilities totalling CN¥17.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥22.5b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is CSSC Science& Technology'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, CSSC Science& Technology made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did CSSC Science& Technology'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¥553m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥5.8b of cash over the last year. So in short it's a really risky stock. 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. Be aware that CSSC Science& Technology is showing 1 warning sign in our investment analysis , you should know about...

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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