We Think Jilin Liyuan Precision Manufacturing (SZSE:002501) Has A Fair Chunk Of 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.' 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 Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) does carry debt. But should shareholders be worried about its use of debt?

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. 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 Jilin Liyuan Precision Manufacturing

What Is Jilin Liyuan Precision Manufacturing's Debt?

You can click the graphic below for the historical numbers, but it shows that Jilin Liyuan Precision Manufacturing had CN¥69.2m of debt in March 2024, down from CN¥199.9m, one year before. On the flip side, it has CN¥24.0m in cash leading to net debt of about CN¥45.2m.

A Look At Jilin Liyuan Precision Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Jilin Liyuan Precision Manufacturing had liabilities of CN¥166.7m due within 12 months and liabilities of CN¥307.2m due beyond that. Offsetting these obligations, it had cash of CN¥24.0m as well as receivables valued at CN¥174.8m due within 12 months. So its liabilities total CN¥275.1m more than the combination of its cash and short-term receivables.

Given Jilin Liyuan Precision Manufacturing has a market capitalization of CN¥3.91b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Jilin Liyuan Precision Manufacturing has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jilin Liyuan Precision 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.

In the last year Jilin Liyuan Precision Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 15%, to CN¥443m. We would much prefer see growth.

Caveat Emptor

Not only did Jilin Liyuan Precision Manufacturing's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥163m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥223m of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Jilin Liyuan Precision Manufacturing (1 doesn't sit too well with us) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.