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.' 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 Henan Qingshuiyuan Technology CO.,Ltd (SZSE:300437) 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?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Henan Qingshuiyuan TechnologyLtd

What Is Henan Qingshuiyuan TechnologyLtd's Net Debt?

As you can see below, Henan Qingshuiyuan TechnologyLtd had CN¥498.1m of debt at June 2023, down from CN¥763.0m a year prior. However, it does have CN¥335.0m in cash offsetting this, leading to net debt of about CN¥163.1m.

A Look At Henan Qingshuiyuan TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Henan Qingshuiyuan TechnologyLtd had liabilities of CN¥1.03b due within 12 months and liabilities of CN¥230.1m due beyond that. Offsetting these obligations, it had cash of CN¥335.0m as well as receivables valued at CN¥622.5m due within 12 months. So its liabilities total CN¥303.2m more than the combination of its cash and short-term receivables.

Since publicly traded Henan Qingshuiyuan TechnologyLtd shares are worth a total of CN¥3.99b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Henan Qingshuiyuan TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Henan Qingshuiyuan TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.3b, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Henan Qingshuiyuan TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥3.4m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥22m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Henan Qingshuiyuan TechnologyLtd you should be aware of, and 1 of them is concerning.

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.