Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that JILIN JINGUAN ELECTRIC Co.,Ltd (SZSE:300510) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is JILIN JINGUAN ELECTRICLtd's Debt?

As you can see below, JILIN JINGUAN ELECTRICLtd had CN¥478.2m of debt at September 2024, down from CN¥536.9m a year prior. On the flip side, it has CN¥303.2m in cash leading to net debt of about CN¥175.0m.

How Healthy Is JILIN JINGUAN ELECTRICLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JILIN JINGUAN ELECTRICLtd had liabilities of CN¥882.4m due within 12 months and liabilities of CN¥151.7m due beyond that. Offsetting this, it had CN¥303.2m in cash and CN¥1.10b in receivables that were due within 12 months. So it can boast CN¥373.5m more liquid assets than total liabilities.

This short term liquidity is a sign that JILIN JINGUAN ELECTRICLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is JILIN JINGUAN ELECTRICLtd'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, JILIN JINGUAN ELECTRICLtd reported revenue of CN¥1.3b, which is a gain of 7.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months JILIN JINGUAN ELECTRICLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥52m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. We've identified 1 warning sign with JILIN JINGUAN ELECTRICLtd , and understanding them should be part of your investment process.

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.