Jiangsu Bojun Industrial Technology (SZSE:300926) Has A Pretty Healthy Balance Sheet

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 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. As with many other companies Jiangsu Bojun Industrial Technology Co., Ltd (SZSE:300926) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Jiangsu Bojun Industrial Technology

How Much Debt Does Jiangsu Bojun Industrial Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Bojun Industrial Technology had CN¥1.80b of debt, an increase on CN¥1.12b, over one year. However, it also had CN¥497.6m in cash, and so its net debt is CN¥1.31b.

A Look At Jiangsu Bojun Industrial Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Bojun Industrial Technology had liabilities of CN¥3.33b due within 12 months and liabilities of CN¥849.5m due beyond that. On the other hand, it had cash of CN¥497.6m and CN¥1.62b worth of receivables due within a year. So it has liabilities totalling CN¥2.06b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Jiangsu Bojun Industrial Technology is worth CN¥8.49b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jiangsu Bojun Industrial Technology's net debt to EBITDA ratio of about 1.7 suggests only moderate use of debt. And its strong interest cover of 17.5 times, makes us even more comfortable. On top of that, Jiangsu Bojun Industrial Technology grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Bojun Industrial Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Jiangsu Bojun Industrial Technology saw substantial negative free cash flow, in total. 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.

Our View

Based on what we've seen Jiangsu Bojun Industrial Technology is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Jiangsu Bojun Industrial Technology is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Case in point: We've spotted 2 warning signs for Jiangsu Bojun Industrial Technology you should be aware of.

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.