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 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. Importantly, Jiangsu Tongrun Equipment Technology Co.,Ltd (SZSE:002150) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Tongrun Equipment TechnologyLtd

How Much Debt Does Jiangsu Tongrun Equipment TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu Tongrun Equipment TechnologyLtd had debt of CN¥347.2m, up from CN¥21.0m in one year. But it also has CN¥922.5m in cash to offset that, meaning it has CN¥575.4m net cash.

How Healthy Is Jiangsu Tongrun Equipment TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Jiangsu Tongrun Equipment TechnologyLtd had liabilities of CN¥1.91b due within 12 months, and liabilities of CN¥165.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥922.5m as well as receivables valued at CN¥812.8m due within 12 months. So its liabilities total CN¥341.1m more than the combination of its cash and short-term receivables.

Of course, Jiangsu Tongrun Equipment TechnologyLtd has a market capitalization of CN¥5.33b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jiangsu Tongrun Equipment TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Jiangsu Tongrun Equipment TechnologyLtd's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Tongrun Equipment TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Tongrun Equipment TechnologyLtd 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 Tongrun Equipment TechnologyLtd's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Jiangsu Tongrun Equipment TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥575.4m. So we are not troubled with Jiangsu Tongrun Equipment TechnologyLtd's debt use. 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. Be aware that Jiangsu Tongrun Equipment TechnologyLtd is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.