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.' 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. As with many other companies Suzhou Jinfu Technology Co., Ltd. (SZSE:300128) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Suzhou Jinfu Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Suzhou Jinfu Technology had CN¥1.63b of debt, an increase on CN¥1.04b, over one year. However, it also had CN¥359.5m in cash, and so its net debt is CN¥1.27b.

A Look At Suzhou Jinfu Technology's Liabilities

The latest balance sheet data shows that Suzhou Jinfu Technology had liabilities of CN¥2.19b due within a year, and liabilities of CN¥344.5m falling due after that. On the other hand, it had cash of CN¥359.5m and CN¥924.6m worth of receivables due within a year. So it has liabilities totalling CN¥1.25b more than its cash and near-term receivables, combined.

Of course, Suzhou Jinfu Technology has a market capitalization of CN¥6.62b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Suzhou Jinfu Technology'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, Suzhou Jinfu Technology reported revenue of CN¥1.9b, which is a gain of 25%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Suzhou Jinfu Technology still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥187m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥775m of cash over the last year. So suffice it to say we consider the stock very risky. 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 3 warning signs with Suzhou Jinfu Technology (at least 2 which shouldn't be ignored) , 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.