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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Shanghai Jin Jiang Online Network Service

What Is Shanghai Jin Jiang Online Network Service's Debt?

The image below, which you can click on for greater detail, shows that Shanghai Jin Jiang Online Network Service had debt of CN¥44.0m at the end of March 2022, a reduction from CN¥68.8m over a year. But on the other hand it also has CN¥2.15b in cash, leading to a CN¥2.11b net cash position.

How Healthy Is Shanghai Jin Jiang Online Network Service's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Jin Jiang Online Network Service had liabilities of CN¥883.4m due within 12 months and liabilities of CN¥417.5m due beyond that. On the other hand, it had cash of CN¥2.15b and CN¥238.6m worth of receivables due within a year. So it can boast CN¥1.09b more liquid assets than total liabilities.

This excess liquidity suggests that Shanghai Jin Jiang Online Network Service is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Shanghai Jin Jiang Online Network Service has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Jin Jiang Online Network Service's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shanghai Jin Jiang Online Network Service had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥2.5b. We would much prefer see growth.

So How Risky Is Shanghai Jin Jiang Online Network Service?

Although Shanghai Jin Jiang Online Network Service had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥659m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 2 warning signs with Shanghai Jin Jiang Online Network Service (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.