David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Jiang Su Suyan Jingshen Co.,Ltd. (SHSE:603299) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jiang Su Suyan JingshenLtd

What Is Jiang Su Suyan JingshenLtd's 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 on the other hand it also has CN¥2.22b in cash, leading to a CN¥598.2m net cash position.

How Strong Is Jiang Su Suyan JingshenLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiang Su Suyan JingshenLtd had liabilities of CN¥3.81b due within 12 months and liabilities of CN¥341.4m due beyond that. On the other hand, it had cash of CN¥2.22b and CN¥1.37b worth of receivables due within a year. So it has liabilities totalling CN¥561.0m more than its cash and near-term receivables, combined.

Given Jiang Su Suyan JingshenLtd has a market capitalization of CN¥9.79b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

Better yet, Jiang Su Suyan JingshenLtd grew its EBIT by 496% last year, which is an impressive improvement. 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 it is Jiang Su Suyan JingshenLtd's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiang Su Suyan JingshenLtd has CN¥598.2m in net cash. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in CN¥710m. So is Jiang Su Suyan JingshenLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jiang Su Suyan JingshenLtd has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.