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 can see that Jiangsu Cnano Technology Co., Ltd. (SHSE:688116) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Jiangsu Cnano Technology's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Cnano Technology had CN¥1.24b of debt, an increase on CN¥820.1m, over one year. However, it does have CN¥1.29b in cash offsetting this, leading to net cash of CN¥52.3m.
How Healthy Is Jiangsu Cnano Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Cnano Technology had liabilities of CN¥896.7m due within 12 months and liabilities of CN¥1.16b due beyond that. On the other hand, it had cash of CN¥1.29b and CN¥954.3m worth of receivables due within a year. So it can boast CN¥194.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Jiangsu Cnano Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Cnano Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Jiangsu Cnano Technology if management cannot prevent a repeat of the 40% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Cnano Technology 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Cnano Technology 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. During the last three years, Jiangsu Cnano Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Jiangsu Cnano Technology has CN¥52.3m in net cash and a decent-looking balance sheet. So while Jiangsu Cnano Technology does not have a great balance sheet, it's certainly not too bad. 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. For example, we've discovered 1 warning sign for Jiangsu Cnano Technology 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.