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.' 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. Importantly, Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shanghai Jin Jiang Online Network Service's Debt?

As you can see below, Shanghai Jin Jiang Online Network Service had CN¥49.8m of debt at June 2024, down from CN¥57.9m a year prior. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥1.62b.

How Strong Is Shanghai Jin Jiang Online Network Service's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Jin Jiang Online Network Service had liabilities of CN¥601.4m due within 12 months and liabilities of CN¥342.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.67b as well as receivables valued at CN¥328.2m due within 12 months. So it can boast CN¥1.05b more liquid assets than total liabilities.

This surplus suggests that Shanghai Jin Jiang Online Network Service is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shanghai Jin Jiang Online Network Service has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Shanghai Jin Jiang Online Network Service made a loss at the EBIT level, last year, it was also good to see that it generated CN¥14m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai Jin Jiang Online Network Service 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shanghai Jin Jiang Online Network Service may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Shanghai Jin Jiang Online Network Service saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Jin Jiang Online Network Service has net cash of CN¥1.62b, as well as more liquid assets than liabilities. So we are not troubled with Shanghai Jin Jiang Online Network Service's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Shanghai Jin Jiang Online Network Service (including 2 which are significant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.