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.' 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. We note that Jiahe Foods Industry Co., Ltd. (SHSE:605300) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Jiahe Foods Industry's Net Debt?

The chart below, which you can click on for greater detail, shows that Jiahe Foods Industry had CN¥555.1m in debt in December 2023; about the same as the year before. However, it does have CN¥1.41b in cash offsetting this, leading to net cash of CN¥858.6m.

A Look At Jiahe Foods Industry's Liabilities

According to the last reported balance sheet, Jiahe Foods Industry had liabilities of CN¥889.3m due within 12 months, and liabilities of CN¥65.0m due beyond 12 months. On the other hand, it had cash of CN¥1.41b and CN¥392.9m worth of receivables due within a year. So it can boast CN¥852.3m more liquid assets than total liabilities.

It's good to see that Jiahe Foods Industry has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jiahe Foods Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Jiahe Foods Industry grew its EBIT by 193% 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 Jiahe Foods Industry 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. Jiahe Foods Industry 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, Jiahe Foods Industry created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiahe Foods Industry has net cash of CN¥858.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 193% over the last year. So is Jiahe Foods Industry's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiahe Foods Industry's earnings per share history for free.

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.