David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shandong Kaisheng New Materials Co.,Ltd. (SZSE:301069) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Shandong Kaisheng New MaterialsLtd Carry?

As you can see below, at the end of December 2023, Shandong Kaisheng New MaterialsLtd had CN¥482.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥942.3m in cash, leading to a CN¥460.3m net cash position.

How Strong Is Shandong Kaisheng New MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that Shandong Kaisheng New MaterialsLtd had liabilities of CN¥327.2m due within a year, and liabilities of CN¥486.8m falling due after that. Offsetting this, it had CN¥942.3m in cash and CN¥297.9m in receivables that were due within 12 months. So it actually has CN¥426.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Shandong Kaisheng New MaterialsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shandong Kaisheng New MaterialsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Shandong Kaisheng New MaterialsLtd if management cannot prevent a repeat of the 31% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Shandong Kaisheng New MaterialsLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shandong Kaisheng New MaterialsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Shandong Kaisheng New MaterialsLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Kaisheng New MaterialsLtd has net cash of CN¥460.3m, as well as more liquid assets than liabilities. So while Shandong Kaisheng New MaterialsLtd does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 3 warning signs we've spotted with Shandong Kaisheng New MaterialsLtd .

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.