Jilin Quanyangquan (SHSE:600189) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jilin Quanyangquan Co., Ltd. (SHSE:600189) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Jilin Quanyangquan

How Much Debt Does Jilin Quanyangquan Carry?

As you can see below, Jilin Quanyangquan had CN¥1.51b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥604.2m in cash, and so its net debt is CN¥903.0m.

How Healthy Is Jilin Quanyangquan's Balance Sheet?

We can see from the most recent balance sheet that Jilin Quanyangquan had liabilities of CN¥2.62b falling due within a year, and liabilities of CN¥432.9m due beyond that. Offsetting these obligations, it had cash of CN¥604.2m as well as receivables valued at CN¥1.69b due within 12 months. So its liabilities total CN¥765.2m more than the combination of its cash and short-term receivables.

Given Jilin Quanyangquan has a market capitalization of CN¥5.92b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jilin Quanyangquan 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, Jilin Quanyangquan made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Jilin Quanyangquan's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥84m 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. We would feel better if it turned its trailing twelve month loss of CN¥473m into a profit. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jilin Quanyangquan's profit, revenue, and operating cashflow have changed over the last few years.

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.