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.' 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 can see that Jinlong Machinery & Electronic Co.,Ltd (SZSE:300032) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jinlong Machinery & ElectronicLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jinlong Machinery & ElectronicLtd had CN¥239.1m of debt, an increase on CN¥203.8m, over one year. But it also has CN¥249.8m in cash to offset that, meaning it has CN¥10.7m net cash.

A Look At Jinlong Machinery & ElectronicLtd's Liabilities

According to the last reported balance sheet, Jinlong Machinery & ElectronicLtd had liabilities of CN¥724.3m due within 12 months, and liabilities of CN¥232.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥249.8m as well as receivables valued at CN¥356.5m due within 12 months. So it has liabilities totalling CN¥350.0m more than its cash and near-term receivables, combined.

Of course, Jinlong Machinery & ElectronicLtd has a market capitalization of CN¥3.54b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jinlong Machinery & ElectronicLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jinlong Machinery & ElectronicLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jinlong Machinery & ElectronicLtd had a loss before interest and tax, and actually shrunk its revenue by 57%, to CN¥1.7b. That makes us nervous, to say the least.

So How Risky Is Jinlong Machinery & ElectronicLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Jinlong Machinery & ElectronicLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥233m and booked a CN¥439m accounting loss. But at least it has CN¥10.7m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Jinlong Machinery & ElectronicLtd , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.