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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Datang International Power Generation Co., Ltd. (HKG:991) does have debt on its balance sheet. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Datang International Power Generation

What Is Datang International Power Generation's Debt?

As you can see below, at the end of March 2022, Datang International Power Generation had CN¥172.7b of debt, up from CN¥149.8b a year ago. Click the image for more detail. On the flip side, it has CN¥10.6b in cash leading to net debt of about CN¥162.1b.

How Strong Is Datang International Power Generation's Balance Sheet?

The latest balance sheet data shows that Datang International Power Generation had liabilities of CN¥94.9b due within a year, and liabilities of CN¥120.7b falling due after that. On the other hand, it had cash of CN¥10.6b and CN¥22.4b worth of receivables due within a year. So it has liabilities totalling CN¥182.6b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥39.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Datang International Power Generation would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Datang International Power Generation will need earnings to service that debt. 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.

In the last year Datang International Power Generation wasn't profitable at an EBIT level, but managed to grow its revenue by 9.4%, to CN¥108b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Datang International Power Generation had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥6.7b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CN¥5.8b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Datang International Power Generation that 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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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.