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. As with many other companies 3Peak Incorporated (SHSE:688536) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is 3Peak's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 3Peak had debt of CN¥53.9m, up from none in one year. However, its balance sheet shows it holds CN¥2.63b in cash, so it actually has CN¥2.57b net cash.

A Look At 3Peak's Liabilities

The latest balance sheet data shows that 3Peak had liabilities of CN¥236.9m due within a year, and liabilities of CN¥34.9m falling due after that. On the other hand, it had cash of CN¥2.63b and CN¥168.9m worth of receivables due within a year. So it can boast CN¥2.52b more liquid assets than total liabilities.

It's good to see that 3Peak has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, 3Peak 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 3Peak 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, 3Peak made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 39%. That makes us nervous, to say the least.

So How Risky Is 3Peak?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 3Peak had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥278m and booked a CN¥35m accounting loss. Given it only has net cash of CN¥2.57b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with 3Peak , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.