Is Jiangsu LiXing General Steel BallLtd (SZSE:300421) Using Too Much Debt?

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.' 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 Jiangsu LiXing General Steel Ball Co.,Ltd. (SZSE:300421) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jiangsu LiXing General Steel BallLtd

What Is Jiangsu LiXing General Steel BallLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu LiXing General Steel BallLtd had CN¥305.2m of debt, an increase on CN¥280.1m, over one year. However, because it has a cash reserve of CN¥177.2m, its net debt is less, at about CN¥128.0m.

How Healthy Is Jiangsu LiXing General Steel BallLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu LiXing General Steel BallLtd had liabilities of CN¥560.6m due within 12 months and liabilities of CN¥78.2m due beyond that. Offsetting this, it had CN¥177.2m in cash and CN¥441.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥19.9m more than its cash and near-term receivables, combined.

Having regard to Jiangsu LiXing General Steel BallLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.43b company is short on cash, but still worth keeping an eye on the balance sheet.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Jiangsu LiXing General Steel BallLtd's net debt is only 0.79 times its EBITDA. And its EBIT easily covers its interest expense, being 13.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Jiangsu LiXing General Steel BallLtd saw its EBIT drop by 3.6% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangsu LiXing General Steel BallLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Jiangsu LiXing General Steel BallLtd reported free cash flow worth 2.0% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

On our analysis Jiangsu LiXing General Steel BallLtd's interest cover should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. In particular, conversion of EBIT to free cash flow gives us cold feet. Considering this range of data points, we think Jiangsu LiXing General Steel BallLtd is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Jiangsu LiXing General Steel BallLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.