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. We note that Jiangxi Lianchuang Opto-Electronic Science&Technologyco.,Ltd (SHSE:600363) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd

What Is Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd had debt of CN¥1.46b, up from CN¥1.37b in one year. But it also has CN¥1.63b in cash to offset that, meaning it has CN¥176.4m net cash.

How Strong Is Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's Balance Sheet?

According to the last reported balance sheet, Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd had liabilities of CN¥2.57b due within 12 months, and liabilities of CN¥471.9m due beyond 12 months. On the other hand, it had cash of CN¥1.63b and CN¥1.27b worth of receivables due within a year. So its liabilities total CN¥137.7m more than the combination of its cash and short-term receivables.

Having regard to Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥14.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd 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 it is future earnings, more than anything, that will determine Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 8.8%. That's not what we would hope to see.

So How Risky Is Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd?

Although Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥319m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jiangxi Lianchuang Opto-Electronic Science&Technologyco.Ltd's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.