David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiangsu Ruitai New Energy Materials Co., Ltd. (SZSE:301238) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Ruitai New Energy Materials's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Ruitai New Energy Materials had debt of CN¥1.62b, up from CN¥493.0m in one year. However, its balance sheet shows it holds CN¥5.69b in cash, so it actually has CN¥4.07b net cash.

How Strong Is Jiangsu Ruitai New Energy Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Ruitai New Energy Materials had liabilities of CN¥2.28b due within 12 months and liabilities of CN¥812.6m due beyond that. On the other hand, it had cash of CN¥5.69b and CN¥1.91b worth of receivables due within a year. So it actually has CN¥4.50b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Ruitai New Energy Materials is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu Ruitai New Energy Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jiangsu Ruitai New Energy Materials's load is not too heavy, because its EBIT was down 48% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Ruitai New Energy Materials will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Ruitai New Energy Materials 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. Over the last three years, Jiangsu Ruitai New Energy Materials recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Ruitai New Energy Materials has net cash of CN¥4.07b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Ruitai New Energy Materials'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. For example, we've discovered 3 warning signs for Jiangsu Ruitai New Energy Materials (2 are significant!) 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.