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.' 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. We note that Shanghai Yaohua Pilkington Glass Group Co., Ltd. (SHSE:600819) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shanghai Yaohua Pilkington Glass Group

What Is Shanghai Yaohua Pilkington Glass Group's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Yaohua Pilkington Glass Group had debt of CN¥916.5m at the end of September 2023, a reduction from CN¥980.6m over a year. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥134.6m net cash.

How Strong Is Shanghai Yaohua Pilkington Glass Group's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Yaohua Pilkington Glass Group had liabilities of CN¥2.70b falling due within a year, and liabilities of CN¥897.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.05b as well as receivables valued at CN¥1.28b due within 12 months. So its liabilities total CN¥1.27b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shanghai Yaohua Pilkington Glass Group is worth CN¥4.60b, 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, Shanghai Yaohua Pilkington Glass Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Yaohua Pilkington Glass Group'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, Shanghai Yaohua Pilkington Glass Group reported revenue of CN¥5.3b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shanghai Yaohua Pilkington Glass Group?

Although Shanghai Yaohua Pilkington Glass Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥229m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example - Shanghai Yaohua Pilkington Glass Group has 1 warning sign we think you should be aware of.

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.

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.