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.' 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 Hunan Lead Power Dazhi Technology Incorporated Company (SZSE:300530) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hunan Lead Power Dazhi Technology

What Is Hunan Lead Power Dazhi Technology's Debt?

As you can see below, at the end of March 2022, Hunan Lead Power Dazhi Technology had CN¥369.4m of debt, up from CN¥313.9m a year ago. Click the image for more detail. However, it does have CN¥160.5m in cash offsetting this, leading to net debt of about CN¥208.9m.

A Look At Hunan Lead Power Dazhi Technology's Liabilities

The latest balance sheet data shows that Hunan Lead Power Dazhi Technology had liabilities of CN¥790.7m due within a year, and liabilities of CN¥920.5m falling due after that. On the other hand, it had cash of CN¥160.5m and CN¥73.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.48b.

While this might seem like a lot, it is not so bad since Hunan Lead Power Dazhi Technology has a market capitalization of CN¥4.90b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Hunan Lead Power Dazhi Technology'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, Hunan Lead Power Dazhi Technology reported revenue of CN¥162m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Hunan Lead Power Dazhi Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥247m. 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. However, it doesn't help that it burned through CN¥185m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Hunan Lead Power Dazhi Technology (including 2 which don't sit too well with us) .

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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