Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Guangdong Jiayuan Technology Co.,Ltd. (SHSE:688388) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Guangdong Jiayuan TechnologyLtd Carry?

As you can see below, at the end of September 2024, Guangdong Jiayuan TechnologyLtd had CN¥4.16b of debt, up from CN¥2.83b a year ago. Click the image for more detail. However, it does have CN¥1.51b in cash offsetting this, leading to net debt of about CN¥2.65b.

How Healthy Is Guangdong Jiayuan TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Guangdong Jiayuan TechnologyLtd had liabilities of CN¥1.79b falling due within a year, and liabilities of CN¥3.66b due beyond that. Offsetting these obligations, it had cash of CN¥1.51b as well as receivables valued at CN¥1.75b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.19b.

This deficit isn't so bad because Guangdong Jiayuan TechnologyLtd is worth CN¥5.89b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guangdong Jiayuan TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Guangdong Jiayuan TechnologyLtd reported revenue of CN¥5.6b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Guangdong Jiayuan TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥112m. 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. However, it doesn't help that it burned through CN¥1.6b of cash over the last year. 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. For example - Guangdong Jiayuan TechnologyLtd 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.