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 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. Importantly, Jiangsu Boamax Technologies Group Co.,Ltd. (SZSE:002514) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Jiangsu Boamax Technologies GroupLtd
What Is Jiangsu Boamax Technologies GroupLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Boamax Technologies GroupLtd had CN¥539.4m of debt, an increase on CN¥372.4m, over one year. On the flip side, it has CN¥77.4m in cash leading to net debt of about CN¥462.0m.
How Strong Is Jiangsu Boamax Technologies GroupLtd's Balance Sheet?
According to the last reported balance sheet, Jiangsu Boamax Technologies GroupLtd had liabilities of CN¥1.17b due within 12 months, and liabilities of CN¥242.7m due beyond 12 months. Offsetting this, it had CN¥77.4m in cash and CN¥577.4m in receivables that were due within 12 months. So its liabilities total CN¥752.9m more than the combination of its cash and short-term receivables.
Since publicly traded Jiangsu Boamax Technologies GroupLtd shares are worth a total of CN¥6.39b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Boamax Technologies GroupLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Jiangsu Boamax Technologies GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥658m, which is a fall of 8.3%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Jiangsu Boamax Technologies GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥6.6m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥952m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu Boamax Technologies GroupLtd (including 1 which is significant) .
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.