Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Shenzhen Kedali Industry Co., Ltd. (SZSE:002850) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Shenzhen Kedali Industry's Net Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Kedali Industry had debt of CN¥1.66b at the end of September 2024, a reduction from CN¥2.76b over a year. However, it does have CN¥2.75b in cash offsetting this, leading to net cash of CN¥1.08b.

How Healthy Is Shenzhen Kedali Industry's Balance Sheet?

According to the last reported balance sheet, Shenzhen Kedali Industry had liabilities of CN¥4.98b due within 12 months, and liabilities of CN¥1.82b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.75b as well as receivables valued at CN¥6.35b due within 12 months. So it can boast CN¥2.31b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Kedali Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Kedali Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shenzhen Kedali Industry grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Kedali Industry's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhen Kedali Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shenzhen Kedali Industry saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Kedali Industry has net cash of CN¥1.08b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 15% in the last twelve months. So we are not troubled with Shenzhen Kedali Industry's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Kedali Industry .

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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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.