Is Jinlong Machinery & ElectronicLtd (SZSE:300032) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Jinlong Machinery & Electronic Co.,Ltd (SZSE:300032) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jinlong Machinery & ElectronicLtd

How Much Debt Does Jinlong Machinery & ElectronicLtd Carry?

As you can see below, Jinlong Machinery & ElectronicLtd had CN¥208.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥286.7m in cash to offset that, meaning it has CN¥78.0m net cash.

How Strong Is Jinlong Machinery & ElectronicLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jinlong Machinery & ElectronicLtd had liabilities of CN¥826.1m due within 12 months and liabilities of CN¥232.0m due beyond that. On the other hand, it had cash of CN¥286.7m and CN¥401.6m worth of receivables due within a year. So its liabilities total CN¥369.7m more than the combination of its cash and short-term receivables.

Of course, Jinlong Machinery & ElectronicLtd has a market capitalization of CN¥4.26b, 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. While it does have liabilities worth noting, Jinlong Machinery & ElectronicLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jinlong Machinery & ElectronicLtd 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, Jinlong Machinery & ElectronicLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 57%. That makes us nervous, to say the least.

So How Risky Is Jinlong Machinery & ElectronicLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Jinlong Machinery & ElectronicLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥137m and booked a CN¥444m accounting loss. However, it has net cash of CN¥78.0m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jinlong Machinery & ElectronicLtd has 2 warning signs we think you should be aware of.

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.

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.