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. Importantly, Jiangsu Phoenix Property Investment Company Limited (SHSE:600716) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangsu Phoenix Property Investment's Debt?

As you can see below, Jiangsu Phoenix Property Investment had CN¥1.61b of debt at September 2024, down from CN¥2.06b a year prior. However, because it has a cash reserve of CN¥548.0m, its net debt is less, at about CN¥1.06b.

How Healthy Is Jiangsu Phoenix Property Investment's Balance Sheet?

According to the last reported balance sheet, Jiangsu Phoenix Property Investment had liabilities of CN¥1.92b due within 12 months, and liabilities of CN¥912.1m due beyond 12 months. On the other hand, it had cash of CN¥548.0m and CN¥76.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.20b.

While this might seem like a lot, it is not so bad since Jiangsu Phoenix Property Investment has a market capitalization of CN¥3.93b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Phoenix Property Investment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jiangsu Phoenix Property Investment wasn't profitable at an EBIT level, but managed to grow its revenue by 56%, to CN¥503m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Jiangsu Phoenix Property Investment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥43m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of CN¥67m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. 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 Jiangsu Phoenix Property Investment .

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.