Would Jiangsu Boamax Technologies GroupLtd (SZSE:002514) Be Better Off With Less 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 Jiangsu Boamax Technologies Group Co.,Ltd. (SZSE:002514) makes use of 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Boamax Technologies GroupLtd

What Is Jiangsu Boamax Technologies GroupLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Jiangsu Boamax Technologies GroupLtd had debt of CN¥472.7m at the end of June 2024, a reduction from CN¥537.1m over a year. However, it also had CN¥42.0m in cash, and so its net debt is CN¥430.7m.

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

Zooming in on the latest balance sheet data, we can see that Jiangsu Boamax Technologies GroupLtd had liabilities of CN¥1.28b due within 12 months and liabilities of CN¥407.1m due beyond that. Offsetting these obligations, it had cash of CN¥42.0m as well as receivables valued at CN¥479.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.16b.

Jiangsu Boamax Technologies GroupLtd has a market capitalization of CN¥3.80b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Boamax Technologies GroupLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jiangsu Boamax Technologies GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥366m, which is a fall of 47%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Jiangsu Boamax Technologies GroupLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥222m 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¥256m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Boamax Technologies GroupLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.