Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hunan Mendale Hometextile Co.,Ltd (SZSE:002397) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hunan Mendale HometextileLtd

What Is Hunan Mendale HometextileLtd's Net Debt?

As you can see below, Hunan Mendale HometextileLtd had CN¥586.9m of debt at September 2022, down from CN¥743.2m a year prior. On the flip side, it has CN¥390.9m in cash leading to net debt of about CN¥196.0m.

How Strong Is Hunan Mendale HometextileLtd's Balance Sheet?

According to the last reported balance sheet, Hunan Mendale HometextileLtd had liabilities of CN¥1.76b due within 12 months, and liabilities of CN¥91.7m due beyond 12 months. On the other hand, it had cash of CN¥390.9m and CN¥444.1m worth of receivables due within a year. So its liabilities total CN¥1.01b more than the combination of its cash and short-term receivables.

Hunan Mendale HometextileLtd has a market capitalization of CN¥3.58b, so it could very likely raise cash to ameliorate 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hunan Mendale HometextileLtd 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 Hunan Mendale HometextileLtd had a loss before interest and tax, and actually shrunk its revenue by 2.7%, to CN¥2.3b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hunan Mendale HometextileLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥304m 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. We would feel better if it turned its trailing twelve month loss of CN¥281m into a profit. So to be blunt we do think it is risky. 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 example, we've discovered 2 warning signs for Hunan Mendale HometextileLtd (1 is a bit concerning!) 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.