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.' 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 Aishida Co., Ltd (SZSE:002403) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Aishida's Debt?

The image below, which you can click on for greater detail, shows that Aishida had debt of CN¥1.51b at the end of September 2024, a reduction from CN¥1.63b over a year. However, it also had CN¥143.2m in cash, and so its net debt is CN¥1.37b.

A Look At Aishida's Liabilities

According to the last reported balance sheet, Aishida had liabilities of CN¥2.58b due within 12 months, and liabilities of CN¥555.8m due beyond 12 months. Offsetting this, it had CN¥143.2m in cash and CN¥912.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.08b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aishida is worth CN¥5.24b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Aishida 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, Aishida reported revenue of CN¥2.8b, which is a gain of 9.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Aishida produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥217m 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. However, it doesn't help that it burned through CN¥22m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Aishida you should be aware of.

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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