Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Jiangsu Guoxin Corp. Ltd. (SZSE:002608) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu Guoxin

How Much Debt Does Jiangsu Guoxin Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Jiangsu Guoxin had debt of CN¥38.0b, up from CN¥31.2b in one year. However, it also had CN¥20.6b in cash, and so its net debt is CN¥17.4b.

How Healthy Is Jiangsu Guoxin's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Guoxin had liabilities of CN¥19.4b due within 12 months and liabilities of CN¥27.4b due beyond that. Offsetting this, it had CN¥20.6b in cash and CN¥3.43b in receivables that were due within 12 months. So its liabilities total CN¥22.7b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥26.1b, so it does suggest shareholders should keep an eye on Jiangsu Guoxin's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Guoxin 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, Jiangsu Guoxin reported revenue of CN¥33b, which is a gain of 6.0%, 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.

Caveat Emptor

Over the last twelve months Jiangsu Guoxin produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥394m. 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¥4.8b 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 Jiangsu Guoxin is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.