David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Jinzhou Yongshan Lithium Co., Ltd (SHSE:603399) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jinzhou Yongshan Lithium's Debt?

The image below, which you can click on for greater detail, shows that Jinzhou Yongshan Lithium had debt of CN¥667.9m at the end of September 2024, a reduction from CN¥739.7m over a year. However, its balance sheet shows it holds CN¥929.7m in cash, so it actually has CN¥261.9m net cash.

A Look At Jinzhou Yongshan Lithium's Liabilities

According to the last reported balance sheet, Jinzhou Yongshan Lithium had liabilities of CN¥1.23b due within 12 months, and liabilities of CN¥657.3m due beyond 12 months. Offsetting this, it had CN¥929.7m in cash and CN¥475.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥483.5m.

Of course, Jinzhou Yongshan Lithium has a market capitalization of CN¥5.97b, 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. Despite its noteworthy liabilities, Jinzhou Yongshan Lithium boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Jinzhou Yongshan Lithium'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, Jinzhou Yongshan Lithium made a loss at the EBIT level, and saw its revenue drop to CN¥6.0b, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is Jinzhou Yongshan Lithium?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Jinzhou Yongshan Lithium lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥12m of cash and made a loss of CN¥91m. Given it only has net cash of CN¥261.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jinzhou Yongshan Lithium's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.