Does Jiangsu Zhongtian Technology (SHSE:600522) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Jiangsu Zhongtian Technology Co., Ltd. (SHSE:600522) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Zhongtian Technology

What Is Jiangsu Zhongtian Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Zhongtian Technology had CN¥5.39b of debt, an increase on CN¥5.06b, over one year. However, it does have CN¥13.0b in cash offsetting this, leading to net cash of CN¥7.61b.

How Healthy Is Jiangsu Zhongtian Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Zhongtian Technology had liabilities of CN¥19.3b due within 12 months and liabilities of CN¥2.85b due beyond that. Offsetting these obligations, it had cash of CN¥13.0b as well as receivables valued at CN¥19.8b due within 12 months. So it actually has CN¥10.6b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Zhongtian Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jiangsu Zhongtian Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Jiangsu Zhongtian Technology's EBIT dived 17%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu Zhongtian Technology's ability to maintain a healthy balance sheet going forward. 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. Jiangsu Zhongtian Technology 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, Jiangsu Zhongtian Technology's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Zhongtian Technology has CN¥7.61b in net cash and a decent-looking balance sheet. So we are not troubled with Jiangsu Zhongtian Technology's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangsu Zhongtian Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.