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.' 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. Importantly, Hunan Kaimeite Gases Co., Ltd. (SZSE:002549) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Hunan Kaimeite Gases Carry?

As you can see below, at the end of March 2024, Hunan Kaimeite Gases had CN¥867.2m of debt, up from CN¥811.7m a year ago. Click the image for more detail. However, it does have CN¥1.70b in cash offsetting this, leading to net cash of CN¥830.2m.

How Healthy Is Hunan Kaimeite Gases' Balance Sheet?

According to the last reported balance sheet, Hunan Kaimeite Gases had liabilities of CN¥991.6m due within 12 months, and liabilities of CN¥166.8m due beyond 12 months. Offsetting this, it had CN¥1.70b in cash and CN¥81.2m in receivables that were due within 12 months. So it can boast CN¥620.2m more liquid assets than total liabilities.

This surplus suggests that Hunan Kaimeite Gases has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hunan Kaimeite Gases 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 Hunan Kaimeite Gases 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.

Over 12 months, Hunan Kaimeite Gases made a loss at the EBIT level, and saw its revenue drop to CN¥575m, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Hunan Kaimeite Gases?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hunan Kaimeite Gases lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥110m of cash and made a loss of CN¥92m. Given it only has net cash of CN¥830.2m, 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. 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. For instance, we've identified 1 warning sign for Hunan Kaimeite Gases that you should be aware of.

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.