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. 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. Importantly, China ITS (Holdings) Co., Ltd. (HKG:1900) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China ITS (Holdings)

How Much Debt Does China ITS (Holdings) Carry?

The chart below, which you can click on for greater detail, shows that China ITS (Holdings) had CN¥793.8m in debt in June 2019; about the same as the year before. However, because it has a cash reserve of CN¥143.8m, its net debt is less, at about CN¥650.0m.

How Strong Is China ITS (Holdings)'s Balance Sheet?

According to the last reported balance sheet, China ITS (Holdings) had liabilities of CN¥1.56b due within 12 months, and liabilities of CN¥299.7m due beyond 12 months. Offsetting this, it had CN¥143.8m in cash and CN¥2.02b in receivables that were due within 12 months. So it actually has CN¥303.1m more liquid assets than total liabilities.

This surplus liquidity suggests that China ITS (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China ITS (Holdings)'s earnings that will influence how the balance sheet holds up in the future. 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.

In the last year China ITS (Holdings) had negative earnings before interest and tax, and actually shrunk its revenue by 9.8%, to CN¥924m. We would much prefer see growth.

Caveat Emptor

Importantly, China ITS (Holdings) had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at CN¥26m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. For riskier companies like China ITS (Holdings) I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.