Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangxi Special Electric MotorLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangxi Special Electric MotorLtd had debt of CN¥1.45b, up from CN¥919.0m in one year. However, it also had CN¥467.9m in cash, and so its net debt is CN¥984.3m.

How Strong Is Jiangxi Special Electric MotorLtd's Balance Sheet?

The latest balance sheet data shows that Jiangxi Special Electric MotorLtd had liabilities of CN¥1.92b due within a year, and liabilities of CN¥846.6m falling due after that. Offsetting this, it had CN¥467.9m in cash and CN¥1.07b in receivables that were due within 12 months. So its liabilities total CN¥1.23b more than the combination of its cash and short-term receivables.

Given Jiangxi Special Electric MotorLtd has a market capitalization of CN¥13.6b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangxi Special Electric MotorLtd'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.

Over 12 months, Jiangxi Special Electric MotorLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 66%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jiangxi Special Electric MotorLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥535m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥852m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Jiangxi Special Electric MotorLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.