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. As with many other companies Jiangsu Gian Technology Co., Ltd. (SZSE:300709) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Gian Technology

What Is Jiangsu Gian Technology's Debt?

As you can see below, Jiangsu Gian Technology had CN¥330.6m of debt at June 2022, down from CN¥511.7m a year prior. But it also has CN¥643.3m in cash to offset that, meaning it has CN¥312.7m net cash.

A Look At Jiangsu Gian Technology's Liabilities

The latest balance sheet data shows that Jiangsu Gian Technology had liabilities of CN¥1.49b due within a year, and liabilities of CN¥95.1m falling due after that. Offsetting these obligations, it had cash of CN¥643.3m as well as receivables valued at CN¥676.5m due within 12 months. So it has liabilities totalling CN¥260.5m more than its cash and near-term receivables, combined.

Since publicly traded Jiangsu Gian Technology shares are worth a total of CN¥5.53b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jiangsu Gian Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Jiangsu Gian Technology grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Gian Technology's ability to maintain a healthy balance sheet going forward. 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 Jiangsu Gian Technology 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. During the last three years, Jiangsu Gian 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

We could understand if investors are concerned about Jiangsu Gian Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥312.7m. And it impressed us with its EBIT growth of 27% over the last year. So we are not troubled with Jiangsu Gian 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. Case in point: We've spotted 4 warning signs for Jiangsu Gian Technology you should be aware of, and 1 of them makes us a bit uncomfortable.

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.