Would Jilin Liyuan Precision Manufacturing (SZSE:002501) Be Better Off With Less Debt?

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.' 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. As with many other companies Jilin Liyuan Precision Manufacturing Co., Ltd. (SZSE:002501) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View 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¥59.3m of debt in September 2024, down from CN¥130.1m, one year before. However, because it has a cash reserve of CN¥7.31m, its net debt is less, at about CN¥52.0m.

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¥255.2m due within 12 months and liabilities of CN¥251.7m due beyond that. Offsetting this, it had CN¥7.31m in cash and CN¥182.6m in receivables that were due within 12 months. So its liabilities total CN¥317.0m more than the combination of its cash and short-term receivables.

Given Jilin Liyuan Precision Manufacturing has a market capitalization of CN¥5.96b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Jilin Liyuan Precision Manufacturing has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jilin Liyuan Precision Manufacturing 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 Jilin Liyuan Precision Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥340m. That makes us nervous, to say the least.

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. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥164m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jilin Liyuan Precision Manufacturing you should know about.

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.