Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jiangsu Zongyi Co.,LTD (SHSE:600770) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

How Much Debt Does Jiangsu ZongyiLTD Carry?

The image below, which you can click on for greater detail, shows that Jiangsu ZongyiLTD had debt of CN¥234.1m at the end of September 2024, a reduction from CN¥318.5m over a year. But on the other hand it also has CN¥1.65b in cash, leading to a CN¥1.42b net cash position.

How Healthy Is Jiangsu ZongyiLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu ZongyiLTD had liabilities of CN¥414.3m due within 12 months and liabilities of CN¥327.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.65b as well as receivables valued at CN¥175.1m due within 12 months. So it actually has CN¥1.09b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu ZongyiLTD is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu ZongyiLTD boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu ZongyiLTD'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.

Over 12 months, Jiangsu ZongyiLTD made a loss at the EBIT level, and saw its revenue drop to CN¥300m, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Jiangsu ZongyiLTD?

While Jiangsu ZongyiLTD lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥7.9m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example - Jiangsu ZongyiLTD has 2 warning signs we think you should be aware of.

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.