Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Jiumaojiu International Holdings Limited (HKG:9922) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Jiumaojiu International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Jiumaojiu International Holdings had CN¥244.2m of debt, an increase on CN¥30.0m, over one year. But it also has CN¥1.87b in cash to offset that, meaning it has CN¥1.63b net cash.

A Look At Jiumaojiu International Holdings' Liabilities

According to the last reported balance sheet, Jiumaojiu International Holdings had liabilities of CN¥1.40b due within 12 months, and liabilities of CN¥1.76b due beyond 12 months. On the other hand, it had cash of CN¥1.87b and CN¥493.4m worth of receivables due within a year. So its liabilities total CN¥800.4m more than the combination of its cash and short-term receivables.

Of course, Jiumaojiu International Holdings has a market capitalization of CN¥6.71b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiumaojiu International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Jiumaojiu International Holdings grew its EBIT by 193% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiumaojiu International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiumaojiu International Holdings 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. Over the most recent three years, Jiumaojiu International Holdings recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Jiumaojiu International Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.63b. And we liked the look of last year's 193% year-on-year EBIT growth. So is Jiumaojiu International Holdings's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Jiumaojiu International Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.