Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jinneng Science&Techology Co.,Ltd (SHSE:603113) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jinneng Science&TechologyLtd

How Much Debt Does Jinneng Science&TechologyLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Jinneng Science&TechologyLtd had debt of CN¥1.94b, up from CN¥1.75b in one year. However, its balance sheet shows it holds CN¥3.31b in cash, so it actually has CN¥1.37b net cash.

How Healthy Is Jinneng Science&TechologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jinneng Science&TechologyLtd had liabilities of CN¥5.08b due within 12 months and liabilities of CN¥1.23b due beyond that. On the other hand, it had cash of CN¥3.31b and CN¥1.16b worth of receivables due within a year. So its liabilities total CN¥1.83b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Jinneng Science&TechologyLtd has a market capitalization of CN¥8.81b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Jinneng Science&TechologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Jinneng Science&TechologyLtd if management cannot prevent a repeat of the 82% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Jinneng Science&TechologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jinneng Science&TechologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jinneng Science&TechologyLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Jinneng Science&TechologyLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.37b. So while Jinneng Science&TechologyLtd does not have a great balance sheet, it's certainly not too bad. 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. We've identified 3 warning signs with Jinneng Science&TechologyLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.