Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Zhejiang Akcome New Energy Technology Co.,Ltd. (SZSE:002610) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Zhejiang Akcome New Energy TechnologyLtd Carry?

As you can see below, Zhejiang Akcome New Energy TechnologyLtd had CN¥3.38b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥1.62b in cash leading to net debt of about CN¥1.76b.

How Healthy Is Zhejiang Akcome New Energy TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Akcome New Energy TechnologyLtd had liabilities of CN¥7.42b due within 12 months, and liabilities of CN¥686.3m due beyond 12 months. On the other hand, it had cash of CN¥1.62b and CN¥2.86b worth of receivables due within a year. So it has liabilities totalling CN¥3.63b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Zhejiang Akcome New Energy TechnologyLtd has a market capitalization of CN¥7.86b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhejiang Akcome New Energy TechnologyLtd 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 Zhejiang Akcome New Energy TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥4.7b. To be frank that doesn't bode well.

Caveat Emptor

While Zhejiang Akcome New Energy TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥124m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥741m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Zhejiang Akcome New Energy TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.