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.' 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, Jiang Su Suyan Jingshen Co.,Ltd. (SHSE:603299) does carry 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiang Su Suyan JingshenLtd

What Is Jiang Su Suyan JingshenLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Jiang Su Suyan JingshenLtd had CN¥1.62b of debt, an increase on CN¥1.42b, over one year. But it also has CN¥2.22b in cash to offset that, meaning it has CN¥598.2m net cash.

A Look At Jiang Su Suyan JingshenLtd's Liabilities

According to the last reported balance sheet, Jiang Su Suyan JingshenLtd had liabilities of CN¥3.81b due within 12 months, and liabilities of CN¥341.4m due beyond 12 months. On the other hand, it had cash of CN¥2.22b and CN¥1.37b worth of receivables due within a year. So its liabilities total CN¥561.0m more than the combination of its cash and short-term receivables.

Since publicly traded Jiang Su Suyan JingshenLtd shares are worth a total of CN¥10.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiang Su Suyan JingshenLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Jiang Su Suyan JingshenLtd grew its EBIT by 496% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiang Su Suyan JingshenLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiang Su Suyan JingshenLtd 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, Jiang Su Suyan JingshenLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Jiang Su Suyan JingshenLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥598.2m. And it impressed us with free cash flow of CN¥710m, being 139% of its EBIT. So is Jiang Su Suyan JingshenLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiang Su Suyan JingshenLtd is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.