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. Importantly, Jiangshan Oupai Door Industry Co., Ltd (SHSE:603208) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Jiangshan Oupai Door Industry

How Much Debt Does Jiangshan Oupai Door Industry Carry?

As you can see below, Jiangshan Oupai Door Industry had CN¥664.0m of debt at June 2023, down from CN¥738.4m a year prior. But on the other hand it also has CN¥739.4m in cash, leading to a CN¥75.4m net cash position.

How Strong Is Jiangshan Oupai Door Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangshan Oupai Door Industry had liabilities of CN¥1.83b due within 12 months and liabilities of CN¥915.0m due beyond that. On the other hand, it had cash of CN¥739.4m and CN¥1.10b worth of receivables due within a year. So it has liabilities totalling CN¥909.9m more than its cash and near-term receivables, combined.

Of course, Jiangshan Oupai Door Industry has a market capitalization of CN¥6.39b, 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, Jiangshan Oupai Door Industry also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Jiangshan Oupai Door Industry 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.

Over 12 months, Jiangshan Oupai Door Industry reported revenue of CN¥3.5b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Jiangshan Oupai Door Industry?

Although Jiangshan Oupai Door Industry had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥474m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for Jiangshan Oupai Door Industry you should be aware of.

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.