David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Jiangxi Zhengbang Technology Co.Ltd. (SZSE:002157) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Jiangxi Zhengbang TechnologyLtd

What Is Jiangxi Zhengbang TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Jiangxi Zhengbang TechnologyLtd had debt of CN¥22.5b, up from CN¥20.1b in one year. However, because it has a cash reserve of CN¥3.07b, its net debt is less, at about CN¥19.4b.

A Look At Jiangxi Zhengbang TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Jiangxi Zhengbang TechnologyLtd had liabilities of CN¥28.7b falling due within a year, and liabilities of CN¥12.0b due beyond that. Offsetting this, it had CN¥3.07b in cash and CN¥865.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥36.7b.

This deficit casts a shadow over the CN¥17.7b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jiangxi Zhengbang TechnologyLtd would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangxi Zhengbang TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Jiangxi Zhengbang TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥41b. That makes us nervous, to say the least.

Caveat Emptor

While Jiangxi Zhengbang TechnologyLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥20b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥5.0b in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Jiangxi Zhengbang TechnologyLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.