Is Jiujiang Defu Technology (SZSE:301511) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiujiang Defu Technology Co., Limited (SZSE:301511) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiujiang Defu Technology

How Much Debt Does Jiujiang Defu Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiujiang Defu Technology had CN¥6.34b of debt, an increase on CN¥3.81b, over one year. However, because it has a cash reserve of CN¥3.83b, its net debt is less, at about CN¥2.51b.

A Look At Jiujiang Defu Technology's Liabilities

We can see from the most recent balance sheet that Jiujiang Defu Technology had liabilities of CN¥8.17b falling due within a year, and liabilities of CN¥1.50b due beyond that. On the other hand, it had cash of CN¥3.83b and CN¥2.63b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.21b.

Jiujiang Defu Technology has a market capitalization of CN¥8.02b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiujiang Defu Technology 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.

In the last year Jiujiang Defu Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to CN¥6.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Jiujiang Defu Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥14m at the EBIT level. 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. Another cause for caution is that is bled CN¥1.9b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Jiujiang Defu Technology .

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.