Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Shenzhen Jieshun Science and Technology Industry Co.,Ltd. (SZSE:002609) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Jieshun Science and Technology IndustryLtd

How Much Debt Does Shenzhen Jieshun Science and Technology IndustryLtd Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Jieshun Science and Technology IndustryLtd had debt of CN¥243.0m at the end of September 2023, a reduction from CN¥365.1m over a year. However, it does have CN¥752.0m in cash offsetting this, leading to net cash of CN¥509.0m.

How Healthy Is Shenzhen Jieshun Science and Technology IndustryLtd's Balance Sheet?

The latest balance sheet data shows that Shenzhen Jieshun Science and Technology IndustryLtd had liabilities of CN¥1.01b due within a year, and liabilities of CN¥264.7m falling due after that. On the other hand, it had cash of CN¥752.0m and CN¥796.5m worth of receivables due within a year. So it actually has CN¥277.2m more liquid assets than total liabilities.

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

It is just as well that Shenzhen Jieshun Science and Technology IndustryLtd's load is not too heavy, because its EBIT was down 30% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Jieshun Science and Technology IndustryLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen Jieshun Science and Technology 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, Shenzhen Jieshun Science and Technology IndustryLtd's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Jieshun Science and Technology IndustryLtd has net cash of CN¥509.0m, as well as more liquid assets than liabilities. So we don't have any problem with Shenzhen Jieshun Science and Technology IndustryLtd's use of debt. 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. For instance, we've identified 1 warning sign for Shenzhen Jieshun Science and Technology IndustryLtd that you should be aware of.

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.