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. We note that Renrenle Commercial Group Co.,Ltd. (SZSE:002336) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Renrenle Commercial GroupLtd

What Is Renrenle Commercial GroupLtd's Debt?

As you can see below, at the end of September 2022, Renrenle Commercial GroupLtd had CN¥100.1m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥421.4m in cash to offset that, meaning it has CN¥321.3m net cash.

How Healthy Is Renrenle Commercial GroupLtd's Balance Sheet?

The latest balance sheet data shows that Renrenle Commercial GroupLtd had liabilities of CN¥2.78b due within a year, and liabilities of CN¥1.99b falling due after that. Offsetting these obligations, it had cash of CN¥421.4m as well as receivables valued at CN¥74.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.27b.

This deficit isn't so bad because Renrenle Commercial GroupLtd is worth CN¥7.15b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Renrenle Commercial GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Renrenle Commercial GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Renrenle Commercial GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥4.2b, which is a fall of 23%. That makes us nervous, to say the least.

So How Risky Is Renrenle Commercial GroupLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Renrenle Commercial GroupLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥7.6m and booked a CN¥636m accounting loss. Given it only has net cash of CN¥321.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example - Renrenle Commercial GroupLtd has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.