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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jiangsu Hengshun Vinegar-Industry Co.,Ltd (SHSE:600305) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Jiangsu Hengshun Vinegar-IndustryLtd

How Much Debt Does Jiangsu Hengshun Vinegar-IndustryLtd Carry?

As you can see below, Jiangsu Hengshun Vinegar-IndustryLtd had CN¥29.0m of debt at June 2023, down from CN¥149.2m a year prior. But it also has CN¥1.79b in cash to offset that, meaning it has CN¥1.76b net cash.

How Healthy Is Jiangsu Hengshun Vinegar-IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu Hengshun Vinegar-IndustryLtd had liabilities of CN¥504.3m due within a year, and liabilities of CN¥132.1m falling due after that. Offsetting this, it had CN¥1.79b in cash and CN¥68.7m in receivables that were due within 12 months. So it actually has CN¥1.22b more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Hengshun Vinegar-IndustryLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jiangsu Hengshun Vinegar-IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Jiangsu Hengshun Vinegar-IndustryLtd grew its EBIT by 8.0% in the last year, making that debt load look even more manageable. 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 Hengshun Vinegar-IndustryLtd'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, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Hengshun Vinegar-IndustryLtd 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. In the last three years, Jiangsu Hengshun Vinegar-IndustryLtd's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Hengshun Vinegar-IndustryLtd has CN¥1.76b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 8.0% in the last twelve months. So we don't think Jiangsu Hengshun Vinegar-IndustryLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Hengshun Vinegar-IndustryLtd .

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.