The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiangsu Hongdou Industrial Co.,LTD (SHSE:600400) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangsu Hongdou IndustrialLTD

What Is Jiangsu Hongdou IndustrialLTD's Net Debt?

As you can see below, at the end of September 2023, Jiangsu Hongdou IndustrialLTD had CN¥1.17b of debt, up from CN¥640.0m a year ago. Click the image for more detail. But it also has CN¥1.24b in cash to offset that, meaning it has CN¥77.0m net cash.

How Strong Is Jiangsu Hongdou IndustrialLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Hongdou IndustrialLTD had liabilities of CN¥1.64b due within 12 months and liabilities of CN¥423.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥704.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥119.6m.

Having regard to Jiangsu Hongdou IndustrialLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.87b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jiangsu Hongdou IndustrialLTD boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Hongdou IndustrialLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jiangsu Hongdou IndustrialLTD had a loss before interest and tax, and actually shrunk its revenue by 6.7%, to CN¥2.2b. We would much prefer see growth.

So How Risky Is Jiangsu Hongdou IndustrialLTD?

Although Jiangsu Hongdou IndustrialLTD had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥8.0m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Hongdou IndustrialLTD (of which 1 can't be ignored!) 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.