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. We note that J.S. Corrugating Machinery Co., Ltd. (SZSE:000821) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for J.S. Corrugating Machinery
How Much Debt Does J.S. Corrugating Machinery Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 J.S. Corrugating Machinery had CN¥846.3m of debt, an increase on CN¥665.6m, over one year. However, its balance sheet shows it holds CN¥2.19b in cash, so it actually has CN¥1.35b net cash.
A Look At J.S. Corrugating Machinery's Liabilities
Zooming in on the latest balance sheet data, we can see that J.S. Corrugating Machinery had liabilities of CN¥11.6b due within 12 months and liabilities of CN¥536.3m due beyond that. Offsetting this, it had CN¥2.19b in cash and CN¥3.75b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.19b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥9.58b, so it does suggest shareholders should keep an eye on J.S. Corrugating Machinery's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, J.S. Corrugating Machinery also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that J.S. Corrugating Machinery grew its EBIT by 120% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if J.S. Corrugating Machinery can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While J.S. Corrugating Machinery 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. Happily for any shareholders, J.S. Corrugating Machinery actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
Although J.S. Corrugating Machinery's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.35b. And it impressed us with free cash flow of CN¥329m, being 105% of its EBIT. So we don't think J.S. Corrugating Machinery'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 1 warning sign we've spotted with J.S. Corrugating Machinery .
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.