Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jiangsu Lettall Electronic Co.,Ltd (SHSE:603629) makes use of debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangsu Lettall ElectronicLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Lettall ElectronicLtd had debt of CN¥926.3m, up from CN¥417.0m in one year. But it also has CN¥1.43b in cash to offset that, meaning it has CN¥506.1m net cash.

A Look At Jiangsu Lettall ElectronicLtd's Liabilities

We can see from the most recent balance sheet that Jiangsu Lettall ElectronicLtd had liabilities of CN¥2.58b falling due within a year, and liabilities of CN¥457.2m due beyond that. On the other hand, it had cash of CN¥1.43b and CN¥658.3m worth of receivables due within a year. So its liabilities total CN¥946.8m more than the combination of its cash and short-term receivables.

Of course, Jiangsu Lettall ElectronicLtd has a market capitalization of CN¥6.34b, 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. Despite its noteworthy liabilities, Jiangsu Lettall ElectronicLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also relevant is that Jiangsu Lettall ElectronicLtd has grown its EBIT by a very respectable 25% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Lettall ElectronicLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Lettall ElectronicLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jiangsu Lettall ElectronicLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jiangsu Lettall ElectronicLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥506.1m. And it impressed us with free cash flow of CN¥445m, being 196% of its EBIT. So we don't think Jiangsu Lettall ElectronicLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jiangsu Lettall ElectronicLtd (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.