Here's Why Changjiang & Jinggong Steel Building (Group) (SHSE:600496) Can Manage Its Debt Responsibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Changjiang & Jinggong Steel Building (Group) Co., Ltd (SHSE:600496) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Changjiang & Jinggong Steel Building (Group)

How Much Debt Does Changjiang & Jinggong Steel Building (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that Changjiang & Jinggong Steel Building (Group) had CN¥3.53b of debt in September 2024, down from CN¥3.73b, one year before. But it also has CN¥4.92b in cash to offset that, meaning it has CN¥1.39b net cash.

How Strong Is Changjiang & Jinggong Steel Building (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Changjiang & Jinggong Steel Building (Group) had liabilities of CN¥12.6b falling due within a year, and liabilities of CN¥2.67b due beyond that. Offsetting this, it had CN¥4.92b in cash and CN¥12.2b in receivables that were due within 12 months. So it can boast CN¥1.92b more liquid assets than total liabilities.

This excess liquidity is a great indication that Changjiang & Jinggong Steel Building (Group)'s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Changjiang & Jinggong Steel Building (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Changjiang & Jinggong Steel Building (Group)'s saving grace is its low debt levels, because its EBIT has tanked 29% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changjiang & Jinggong Steel Building (Group) 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Changjiang & Jinggong Steel Building (Group) 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, Changjiang & Jinggong Steel Building (Group) 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 it is always sensible to investigate a company's debt, in this case Changjiang & Jinggong Steel Building (Group) has CN¥1.39b in net cash and a decent-looking balance sheet. So we are not troubled with Changjiang & Jinggong Steel Building (Group)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Changjiang & Jinggong Steel Building (Group) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.