The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Greenworks (Jiangsu) Co., Ltd. (SZSE:301260) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 Greenworks (Jiangsu)'s Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Greenworks (Jiangsu) had debt of CN¥2.26b, up from CN¥2.10b in one year. However, it does have CN¥3.60b in cash offsetting this, leading to net cash of CN¥1.33b.

A Look At Greenworks (Jiangsu)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Greenworks (Jiangsu) had liabilities of CN¥2.89b due within 12 months and liabilities of CN¥1.09b due beyond that. Offsetting these obligations, it had cash of CN¥3.60b as well as receivables valued at CN¥1.14b due within 12 months. So it can boast CN¥761.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Greenworks (Jiangsu) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Greenworks (Jiangsu) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Greenworks (Jiangsu) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Greenworks (Jiangsu) had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥4.5b. We would much prefer see growth.

So How Risky Is Greenworks (Jiangsu)?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Greenworks (Jiangsu) had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥706m and booked a CN¥111m accounting loss. Given it only has net cash of CN¥1.33b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Greenworks (Jiangsu) is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.