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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shanghai Jinfeng Wine Company Limited (SHSE:600616) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shanghai Jinfeng Wine's Debt?

As you can see below, at the end of September 2023, Shanghai Jinfeng Wine had CN¥38.8m of debt, up from CN¥31.7m a year ago. Click the image for more detail. However, it does have CN¥892.5m in cash offsetting this, leading to net cash of CN¥853.7m.

How Strong Is Shanghai Jinfeng Wine's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Jinfeng Wine had liabilities of CN¥223.1m due within 12 months and liabilities of CN¥67.8m due beyond that. Offsetting this, it had CN¥892.5m in cash and CN¥87.7m in receivables that were due within 12 months. So it actually has CN¥689.2m more liquid assets than total liabilities.

It's good to see that Shanghai Jinfeng Wine has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shanghai Jinfeng Wine has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Jinfeng Wine'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.

In the last year Shanghai Jinfeng Wine had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥606m. That's not what we would hope to see.

So How Risky Is Shanghai Jinfeng Wine?

While Shanghai Jinfeng Wine lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥140m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example - Shanghai Jinfeng Wine has 1 warning sign we think you should be aware of.

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.