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.' 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. As with many other companies Jinyuan EP Co., Ltd. (SZSE:000546) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Jinyuan EP Carry?

You can click the graphic below for the historical numbers, but it shows that Jinyuan EP had CN¥127.2m of debt in September 2024, down from CN¥1.37b, one year before. However, its balance sheet shows it holds CN¥196.9m in cash, so it actually has CN¥69.7m net cash.

A Look At Jinyuan EP's Liabilities

The latest balance sheet data shows that Jinyuan EP had liabilities of CN¥821.2m due within a year, and liabilities of CN¥97.0m falling due after that. Offsetting these obligations, it had cash of CN¥196.9m as well as receivables valued at CN¥711.9m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Jinyuan EP's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥3.96b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Jinyuan EP 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 Jinyuan EP'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 Jinyuan EP wasn't profitable at an EBIT level, but managed to grow its revenue by 110%, to CN¥5.8b. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Jinyuan EP?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Jinyuan EP had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥525m of cash and made a loss of CN¥486m. Given it only has net cash of CN¥69.7m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Jinyuan EP has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 1 warning sign with Jinyuan EP , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.