Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jiangxi Rimag Group Co., Ltd. (HKG:2522) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangxi Rimag Group's Debt?

The image below, which you can click on for greater detail, shows that Jiangxi Rimag Group had debt of CN¥265.4m at the end of June 2024, a reduction from CN¥358.2m over a year. However, it does have CN¥322.5m in cash offsetting this, leading to net cash of CN¥57.2m.

How Healthy Is Jiangxi Rimag Group's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Rimag Group had liabilities of CN¥373.5m falling due within a year, and liabilities of CN¥242.4m due beyond that. Offsetting these obligations, it had cash of CN¥322.5m as well as receivables valued at CN¥436.7m due within 12 months. So it can boast CN¥143.3m more liquid assets than total liabilities.

This state of affairs indicates that Jiangxi Rimag Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥17.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Jiangxi Rimag Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Jiangxi Rimag Group's EBIT was down 89% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Jiangxi Rimag Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangxi Rimag Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Jiangxi Rimag Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangxi Rimag Group has net cash of CN¥57.2m, as well as more liquid assets than liabilities. Despite its cash we think that Jiangxi Rimag Group seems to struggle to grow its EBIT, so we are wary of the 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. Case in point: We've spotted 2 warning signs for Jiangxi Rimag Group 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.