Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jiujiang Defu Technology Co., Limited (SZSE:301511) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiujiang Defu Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiujiang Defu Technology had debt of CN¥8.33b, up from CN¥5.67b in one year. However, it also had CN¥4.32b in cash, and so its net debt is CN¥4.02b.

How Strong Is Jiujiang Defu Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiujiang Defu Technology had liabilities of CN¥9.96b due within 12 months and liabilities of CN¥1.46b due beyond that. On the other hand, it had cash of CN¥4.32b and CN¥3.44b worth of receivables due within a year. So its liabilities total CN¥3.67b more than the combination of its cash and short-term receivables.

Jiujiang Defu Technology has a market capitalization of CN¥8.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiujiang Defu Technology 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 Jiujiang Defu Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 4.9%, to CN¥6.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Jiujiang Defu Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥161m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥567m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Jiujiang Defu Technology is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.

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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.