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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiangsu Cnano Technology Co., Ltd. (SHSE:688116) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Cnano Technology

What Is Jiangsu Cnano Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Jiangsu Cnano Technology had CN¥724.8m of debt, an increase on CN¥89.1m, over one year. However, its balance sheet shows it holds CN¥1.41b in cash, so it actually has CN¥682.8m net cash.

How Healthy Is Jiangsu Cnano Technology's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Cnano Technology had liabilities of CN¥537.8m falling due within a year, and liabilities of CN¥713.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.41b as well as receivables valued at CN¥801.0m due within 12 months. So it can boast CN¥956.9m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Cnano Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Cnano Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Jiangsu Cnano Technology grew its EBIT by 160% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Cnano Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Cnano Technology 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. During the last three years, Jiangsu Cnano Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Cnano Technology has net cash of CN¥682.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 160% over the last year. So we are not troubled with Jiangsu Cnano Technology's debt use. 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. Be aware that Jiangsu Cnano Technology is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.