Here's Why Jiangsu Zhongtian Technology (SHSE:600522) Can Manage Its Debt Responsibly

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.' 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Jiangsu Zhongtian Technology

What Is Jiangsu Zhongtian Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Zhongtian Technology had debt of CN¥5.39b, up from CN¥5.06b in one year. But it also has CN¥13.0b in cash to offset that, meaning it has CN¥7.61b net cash.

How Strong Is Jiangsu Zhongtian Technology's Balance Sheet?

The latest balance sheet data shows that Jiangsu Zhongtian Technology had liabilities of CN¥19.3b due within a year, and liabilities of CN¥2.85b falling due after that. Offsetting this, it had CN¥13.0b in cash and CN¥19.8b in receivables that were due within 12 months. So it can boast CN¥10.6b more liquid assets than total liabilities.

It's good to see that Jiangsu Zhongtian Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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.

But the bad news is that Jiangsu Zhongtian Technology has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Zhongtian Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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's not great, when it comes to paying down debt.

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 don't have any problem with Jiangsu Zhongtian Technology's use of debt. 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.

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.