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. Importantly, Jilin Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Jilin Liyuan Precision Manufacturing Carry?

The image below, which you can click on for greater detail, shows that Jilin Liyuan Precision Manufacturing had debt of CN¥69.2m at the end of March 2024, a reduction from CN¥199.9m over a year. On the flip side, it has CN¥24.0m in cash leading to net debt of about CN¥45.2m.

How Healthy Is Jilin Liyuan Precision Manufacturing's Balance Sheet?

According to the last reported balance sheet, Jilin Liyuan Precision Manufacturing had liabilities of CN¥166.7m due within 12 months, and liabilities of CN¥307.2m due beyond 12 months. Offsetting this, it had CN¥24.0m in cash and CN¥174.8m in receivables that were due within 12 months. So its liabilities total CN¥275.1m more than the combination of its cash and short-term receivables.

Since publicly traded Jilin Liyuan Precision Manufacturing shares are worth a total of CN¥4.54b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Jilin Liyuan Precision Manufacturing has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Jilin Liyuan Precision Manufacturing'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.

In the last year Jilin Liyuan Precision Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥443m. We would much prefer see growth.

Caveat Emptor

While Jilin Liyuan Precision Manufacturing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥163m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥223m of cash over the last year. So to be blunt we think it is risky. 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. For example, we've discovered 1 warning sign for Jilin Liyuan Precision Manufacturing that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.