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.' 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. Importantly, Sichuan Crun Co., Ltd (SZSE:002272) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Sichuan Crun's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sichuan Crun had CN¥977.5m of debt, an increase on CN¥886.1m, over one year. On the flip side, it has CN¥357.8m in cash leading to net debt of about CN¥619.6m.

A Look At Sichuan Crun's Liabilities

According to the last reported balance sheet, Sichuan Crun had liabilities of CN¥1.38b due within 12 months, and liabilities of CN¥556.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥357.8m as well as receivables valued at CN¥1.38b due within 12 months. So it has liabilities totalling CN¥199.2m more than its cash and near-term receivables, combined.

Since publicly traded Sichuan Crun shares are worth a total of CN¥3.99b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sichuan Crun'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, Sichuan Crun made a loss at the EBIT level, and saw its revenue drop to CN¥1.6b, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

Not only did Sichuan Crun's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥40m 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. Another cause for caution is that is bled CN¥105m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 example, we've discovered 4 warning signs for Sichuan Crun (3 don't sit too well with us!) that you should be aware of before investing here.

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.