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 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. Importantly, Jinhui Shipping and Transportation Limited (OB:JIN) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jinhui Shipping and Transportation

What Is Jinhui Shipping and Transportation's Net Debt?

As you can see below, at the end of June 2019, Jinhui Shipping and Transportation had US$118.3m of debt, up from US$87.6m a year ago. Click the image for more detail. However, it does have US$109.8m in cash offsetting this, leading to net debt of about US$8.46m.

How Healthy Is Jinhui Shipping and Transportation's Balance Sheet?

We can see from the most recent balance sheet that Jinhui Shipping and Transportation had liabilities of US$76.4m falling due within a year, and liabilities of US$61.5m due beyond that. On the other hand, it had cash of US$109.8m and US$16.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$11.9m.

Of course, Jinhui Shipping and Transportation has a market capitalization of US$92.9m, so these liabilities are probably manageable. 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 ultimately the future profitability of the business will decide if Jinhui Shipping and Transportation can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jinhui Shipping and Transportation made a loss at the EBIT level, and saw its revenue drop to US$63m, which is a fall of 21%. To be frank that doesn't bode well.

Caveat Emptor

While Jinhui Shipping and Transportation'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 US$831k at the EBIT level. 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. Another cause for caution is that is bled US$44m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Jinhui Shipping and Transportation I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.