Is Jilin Yatai (Group) (SHSE:600881) 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.' 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. We can see that Jilin Yatai (Group) Co., Ltd. (SHSE:600881) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jilin Yatai (Group)

What Is Jilin Yatai (Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jilin Yatai (Group) had CN¥29.6b of debt, an increase on CN¥27.7b, over one year. However, because it has a cash reserve of CN¥952.5m, its net debt is less, at about CN¥28.6b.

How Healthy Is Jilin Yatai (Group)'s Balance Sheet?

The latest balance sheet data shows that Jilin Yatai (Group) had liabilities of CN¥38.2b due within a year, and liabilities of CN¥1.71b falling due after that. Offsetting these obligations, it had cash of CN¥952.5m as well as receivables valued at CN¥5.53b due within 12 months. So it has liabilities totalling CN¥33.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥6.39b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jilin Yatai (Group) would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jilin Yatai (Group)'s earnings that will influence how the balance sheet holds up in the future. 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, Jilin Yatai (Group) made a loss at the EBIT level, and saw its revenue drop to CN¥6.6b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Jilin Yatai (Group)'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 a very considerable CN¥2.3b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥3.9b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jilin Yatai (Group) (1 is a bit unpleasant) you should be aware of.

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.

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.