Is Jikai Equipment Manufacturing (SZSE:002691) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Jikai Equipment Manufacturing Co., Ltd. (SZSE:002691) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jikai Equipment Manufacturing

What Is Jikai Equipment Manufacturing's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jikai Equipment Manufacturing had CN¥60.0m of debt, an increase on CN¥30.0m, over one year. But on the other hand it also has CN¥108.0m in cash, leading to a CN¥48.0m net cash position.

A Look At Jikai Equipment Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Jikai Equipment Manufacturing had liabilities of CN¥236.8m due within 12 months and liabilities of CN¥25.3m due beyond that. Offsetting these obligations, it had cash of CN¥108.0m as well as receivables valued at CN¥307.3m due within 12 months. So it actually has CN¥153.2m more liquid assets than total liabilities.

This surplus suggests that Jikai Equipment Manufacturing has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jikai Equipment Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jikai Equipment Manufacturing will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jikai Equipment Manufacturing made a loss at the EBIT level, and saw its revenue drop to CN¥312m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Jikai Equipment Manufacturing?

Although Jikai Equipment Manufacturing had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥8.7m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 2 warning signs for Jikai Equipment Manufacturing you should be aware of, and 1 of them is potentially serious.

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.

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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.