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.' 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 Jiao Yun Group Co., Ltd. (SHSE:600676) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Shanghai Jiao Yun Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Shanghai Jiao Yun Group had debt of CN¥109.1m, up from CN¥49.0m in one year. However, its balance sheet shows it holds CN¥2.75b in cash, so it actually has CN¥2.64b net cash.

How Healthy Is Shanghai Jiao Yun Group's Balance Sheet?

The latest balance sheet data shows that Shanghai Jiao Yun Group had liabilities of CN¥1.26b due within a year, and liabilities of CN¥640.4m falling due after that. Offsetting these obligations, it had cash of CN¥2.75b as well as receivables valued at CN¥950.0m due within 12 months. So it can boast CN¥1.80b more liquid assets than total liabilities.

This luscious liquidity implies that Shanghai Jiao Yun Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shanghai Jiao Yun Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Jiao Yun 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.

In the last year Shanghai Jiao Yun Group had a loss before interest and tax, and actually shrunk its revenue by 22%, to CN¥4.4b. That makes us nervous, to say the least.

So How Risky Is Shanghai Jiao Yun Group?

Although Shanghai Jiao Yun Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥413m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Jiao Yun Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.