Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 H&R Century Union Corporation (SZSE:000892) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for H&R Century Union

What Is H&R Century Union's Debt?

As you can see below, H&R Century Union had CN¥93.4m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥490.9m in cash offsetting this, leading to net cash of CN¥397.5m.

How Healthy Is H&R Century Union's Balance Sheet?

We can see from the most recent balance sheet that H&R Century Union had liabilities of CN¥569.3m falling due within a year, and liabilities of CN¥51.2m due beyond that. Offsetting these obligations, it had cash of CN¥490.9m as well as receivables valued at CN¥380.4m due within 12 months. So it can boast CN¥250.8m more liquid assets than total liabilities.

This short term liquidity is a sign that H&R Century Union could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that H&R Century Union has more cash than debt is arguably a good indication that it can manage its debt safely. 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 H&R Century Union 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.

Over 12 months, H&R Century Union made a loss at the EBIT level, and saw its revenue drop to CN¥83m, which is a fall of 89%. To be frank that doesn't bode well.

So How Risky Is H&R Century Union?

Although H&R Century Union had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥101m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that H&R Century Union is showing 2 warning signs in our investment analysis , you should know about...

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.