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 $XD Inc.(02400.HK)$ does have debt on its balance sheet.  But is this debt a concern to shareholders?

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 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.  When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for XD

How Much Debt Does XD Carry?

The image below, which you can click on for greater detail, shows that at December 2021 XD had debt of CN¥1.68b, up from none in one year.    However, its balance sheet shows it holds CN¥3.96b in cash, so it actually has CN¥2.27b net cash.

SEHK:2400 Debt to Equity History May 25th 2022

How Healthy Is XD's Balance Sheet?

According to the last reported balance sheet, XD had liabilities of CN¥909.7m due within 12 months, and liabilities of CN¥1.75b due beyond 12 months.   Offsetting these obligations, it had cash of CN¥3.96b as well as receivables valued at CN¥223.6m due within 12 months.   So it can boast CN¥1.52b more liquid assets than total liabilities.

This surplus suggests that XD is using debt in a way that is appears to be both safe and conservative.   Because it has plenty of assets, it is unlikely to have trouble with its lenders.    Succinctly put, XD 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 XD can strengthen its balance sheet over time.  So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, XD made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 5.1%.   We would much prefer see growth.

So How Risky Is XD?

Statistically speaking companies that lose money are riskier than those that make money.  And the fact is that over the last twelve months XD lost money at the earnings before interest and tax (EBIT) line.  And over the same period it saw negative free cash outflow of CN¥623m and booked a CN¥864m accounting loss.   With only CN¥2.27b on the balance sheet, it would appear that its going to need to raise capital again 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.  However, not all investment risk resides within the balance sheet - far from it.   These risks can be hard to spot. Every company has them, and we've spotted   2 warning signs for XD  you should know about.

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.