Is Guangdong Jiayuan TechnologyLtd (SHSE:688388) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Guangdong Jiayuan Technology Co.,Ltd. (SHSE:688388) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Guangdong Jiayuan TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Guangdong Jiayuan TechnologyLtd had debt of CN¥4.17b, up from CN¥2.94b in one year. On the flip side, it has CN¥1.51b in cash leading to net debt of about CN¥2.66b.

How Strong Is Guangdong Jiayuan TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Jiayuan TechnologyLtd had liabilities of CN¥1.79b due within a year, and liabilities of CN¥3.66b falling due after that. Offsetting this, it had CN¥1.51b in cash and CN¥1.75b in receivables that were due within 12 months. So its liabilities total CN¥2.19b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Guangdong Jiayuan TechnologyLtd has a market capitalization of CN¥7.70b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Guangdong Jiayuan TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for Guangdong Jiayuan TechnologyLtd

Over 12 months, Guangdong Jiayuan TechnologyLtd reported revenue of CN¥6.5b, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Guangdong Jiayuan TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥263m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.6b of cash over the last year. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangdong Jiayuan TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.

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.