Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Keshun Waterproof Technolgies Co.,Ltd. (SZSE:300737) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is Keshun Waterproof TechnolgiesLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Keshun Waterproof TechnolgiesLtd had debt of CN¥4.51b, up from CN¥2.61b in one year. However, because it has a cash reserve of CN¥2.93b, its net debt is less, at about CN¥1.57b.

A Look At Keshun Waterproof TechnolgiesLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Keshun Waterproof TechnolgiesLtd had liabilities of CN¥5.24b due within 12 months and liabilities of CN¥3.01b due beyond that. On the other hand, it had cash of CN¥2.93b and CN¥5.41b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Keshun Waterproof TechnolgiesLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.07b company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Keshun Waterproof TechnolgiesLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Keshun Waterproof TechnolgiesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥7.6b, which is a fall of 2.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, Keshun Waterproof TechnolgiesLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥398m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Keshun Waterproof TechnolgiesLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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