Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jiawei Renewable Energy Co., Ltd. (SZSE:300317) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiawei Renewable Energy's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiawei Renewable Energy had debt of CN¥626.2m, up from CN¥345.4m in one year. However, because it has a cash reserve of CN¥320.4m, its net debt is less, at about CN¥305.9m.

A Look At Jiawei Renewable Energy's Liabilities

According to the last reported balance sheet, Jiawei Renewable Energy had liabilities of CN¥764.9m due within 12 months, and liabilities of CN¥596.7m due beyond 12 months. Offsetting this, it had CN¥320.4m in cash and CN¥595.5m in receivables that were due within 12 months. So its liabilities total CN¥445.7m more than the combination of its cash and short-term receivables.

Since publicly traded Jiawei Renewable Energy shares are worth a total of CN¥3.82b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiawei Renewable Energy 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 Jiawei Renewable Energy wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to CN¥677m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Jiawei Renewable Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥73m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥382m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jiawei Renewable Energy's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.