Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Jiangsu Boamax Technologies Group Co.,Ltd. (SZSE:002514) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Jiangsu Boamax Technologies GroupLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu Boamax Technologies GroupLtd had debt of CN¥539.4m, up from CN¥372.4m in one year. On the flip side, it has CN¥77.4m in cash leading to net debt of about CN¥462.0m.

How Healthy Is Jiangsu Boamax Technologies GroupLtd's Balance Sheet?

According to the last reported balance sheet, Jiangsu Boamax Technologies GroupLtd had liabilities of CN¥1.17b due within 12 months, and liabilities of CN¥242.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥77.4m as well as receivables valued at CN¥577.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥752.9m.

Of course, Jiangsu Boamax Technologies GroupLtd has a market capitalization of CN¥4.99b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Boamax Technologies GroupLtd 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.

Over 12 months, Jiangsu Boamax Technologies GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥658m, which is a fall of 8.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Jiangsu Boamax Technologies GroupLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥6.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥952m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Jiangsu Boamax Technologies GroupLtd that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.