Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Changbao Steeltube Co.,Ltd (SZSE:002478) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Changbao SteeltubeLtd

What Is Jiangsu Changbao SteeltubeLtd's Debt?

As you can see below, Jiangsu Changbao SteeltubeLtd had CN¥268.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.44b in cash, leading to a CN¥1.17b net cash position.

A Look At Jiangsu Changbao SteeltubeLtd's Liabilities

According to the last reported balance sheet, Jiangsu Changbao SteeltubeLtd had liabilities of CN¥2.45b due within 12 months, and liabilities of CN¥210.6m due beyond 12 months. Offsetting this, it had CN¥1.44b in cash and CN¥1.46b in receivables that were due within 12 months. So it actually has CN¥233.7m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Changbao SteeltubeLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Changbao SteeltubeLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jiangsu Changbao SteeltubeLtd's load is not too heavy, because its EBIT was down 75% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Changbao SteeltubeLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Changbao SteeltubeLtd 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. In the last three years, Jiangsu Changbao SteeltubeLtd created free cash flow amounting to 7.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Changbao SteeltubeLtd has net cash of CN¥1.17b, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu Changbao SteeltubeLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Jiangsu Changbao SteeltubeLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.