The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Shanghai Jinfeng Wine Company Limited (SHSE:600616) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Shanghai Jinfeng Wine Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Jinfeng Wine had CN¥37.8m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥883.7m in cash, so it actually has CN¥845.9m net cash.

A Look At Shanghai Jinfeng Wine's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Jinfeng Wine had liabilities of CN¥169.2m due within 12 months and liabilities of CN¥90.7m due beyond that. On the other hand, it had cash of CN¥883.7m and CN¥52.8m worth of receivables due within a year. So it actually has CN¥676.5m more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Jinfeng Wine is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shanghai Jinfeng Wine has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shanghai Jinfeng Wine's earnings that will influence how the balance sheet holds up in the future. 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 Jinfeng Wine had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to CN¥567m. We would much prefer see growth.

So How Risky Is Shanghai Jinfeng Wine?

While Shanghai Jinfeng Wine lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥24m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shanghai Jinfeng Wine .

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.