The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Jilin Yatai (Group) Co., Ltd. (SHSE:600881) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jilin Yatai (Group)'s Debt?

The image below, which you can click on for greater detail, shows that Jilin Yatai (Group) had debt of CN¥27.7b at the end of September 2023, a reduction from CN¥29.4b over a year. However, because it has a cash reserve of CN¥798.6m, its net debt is less, at about CN¥26.9b.

A Look At Jilin Yatai (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Jilin Yatai (Group) had liabilities of CN¥35.4b due within 12 months and liabilities of CN¥3.99b due beyond that. Offsetting this, it had CN¥798.6m in cash and CN¥5.92b in receivables that were due within 12 months. So its liabilities total CN¥32.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥5.82b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Jilin Yatai (Group) would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jilin Yatai (Group)'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.

In the last year Jilin Yatai (Group) had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥10b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jilin Yatai (Group)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥3.5b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥3.8b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jilin Yatai (Group) is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.