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 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. We note that Jiangsu Yike Food Group Co.,Ltd (SZSE:301116) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Yike Food GroupLtd's Net Debt?

As you can see below, Jiangsu Yike Food GroupLtd had CN¥1.32b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥675.5m in cash offsetting this, leading to net debt of about CN¥642.2m.

A Look At Jiangsu Yike Food GroupLtd's Liabilities

According to the last reported balance sheet, Jiangsu Yike Food GroupLtd had liabilities of CN¥2.33b due within 12 months, and liabilities of CN¥839.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥675.5m as well as receivables valued at CN¥345.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.15b.

While this might seem like a lot, it is not so bad since Jiangsu Yike Food GroupLtd has a market capitalization of CN¥5.46b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Yike Food GroupLtd can strengthen its balance sheet over time. 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, Jiangsu Yike Food GroupLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Jiangsu Yike Food GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥53m 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. We would feel better if it turned its trailing twelve month loss of CN¥133m into a profit. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Yike Food GroupLtd (of which 1 makes us a bit uncomfortable!) you should know about.

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.