Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jilin Yatai (Group) Co., Ltd. (SHSE:600881) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Jilin Yatai (Group)'s Net Debt?

The chart below, which you can click on for greater detail, shows that Jilin Yatai (Group) had CN¥28.6b in debt in June 2024; about the same as the year before. On the flip side, it has CN¥923.9m in cash leading to net debt of about CN¥27.6b.

A Look At Jilin Yatai (Group)'s Liabilities

According to the last reported balance sheet, Jilin Yatai (Group) had liabilities of CN¥36.4b due within 12 months, and liabilities of CN¥2.79b due beyond 12 months. Offsetting these obligations, it had cash of CN¥923.9m as well as receivables valued at CN¥5.39b due within 12 months. So it has liabilities totalling CN¥32.9b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥3.80b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Jilin Yatai (Group) would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jilin Yatai (Group) will need earnings to service that debt. 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, Jilin Yatai (Group) made a loss at the EBIT level, and saw its revenue drop to CN¥7.5b, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jilin Yatai (Group)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥2.5b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥4.0b in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jilin Yatai (Group) has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.