We Think Guangdong Jiayuan TechnologyLtd (SHSE:688388) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Guangdong Jiayuan Technology Co.,Ltd. (SHSE:688388) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Guangdong Jiayuan TechnologyLtd

How Much Debt Does Guangdong Jiayuan TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Guangdong Jiayuan TechnologyLtd had CN¥3.64b of debt, an increase on CN¥2.20b, over one year. However, it does have CN¥2.63b in cash offsetting this, leading to net debt of about CN¥1.01b.

How Healthy Is Guangdong Jiayuan TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Guangdong Jiayuan TechnologyLtd had liabilities of CN¥1.53b due within a year, and liabilities of CN¥3.42b falling due after that. On the other hand, it had cash of CN¥2.63b and CN¥1.10b worth of receivables due within a year. So its liabilities total CN¥1.23b 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¥4.69b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Guangdong Jiayuan TechnologyLtd reported revenue of CN¥4.9b, which is a gain of 5.4%, 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

Importantly, Guangdong Jiayuan TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥39m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥696m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Guangdong Jiayuan TechnologyLtd has 1 warning sign we think you should be aware of.

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.