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.' 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. We note that Greenworks (Jiangsu) Co., Ltd. (SZSE:301260) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Greenworks (Jiangsu)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Greenworks (Jiangsu) had CN¥2.08b of debt in March 2024, down from CN¥2.83b, one year before. However, it does have CN¥2.67b in cash offsetting this, leading to net cash of CN¥582.5m.

How Strong Is Greenworks (Jiangsu)'s Balance Sheet?

The latest balance sheet data shows that Greenworks (Jiangsu) had liabilities of CN¥2.89b due within a year, and liabilities of CN¥1.38b falling due after that. On the other hand, it had cash of CN¥2.67b and CN¥2.14b worth of receivables due within a year. So it actually has CN¥543.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Greenworks (Jiangsu) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Greenworks (Jiangsu) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Greenworks (Jiangsu) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Greenworks (Jiangsu) had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to CN¥4.7b. That's not what we would hope to see.

So How Risky Is Greenworks (Jiangsu)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Greenworks (Jiangsu) 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¥262m and booked a CN¥432m accounting loss. But the saving grace is the CN¥582.5m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Greenworks (Jiangsu) , and understanding them should be part of your investment process.

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.

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