Jiangsu Zhongtian Technology (SHSE:600522) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Zhongtian Technology Co., Ltd. (SHSE:600522) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Jiangsu Zhongtian Technology Carry?

As you can see below, Jiangsu Zhongtian Technology had CN¥5.34b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥12.9b in cash, so it actually has CN¥7.60b net cash.

How Healthy Is Jiangsu Zhongtian Technology's Balance Sheet?

According to the last reported balance sheet, Jiangsu Zhongtian Technology had liabilities of CN¥17.2b due within 12 months, and liabilities of CN¥2.12b due beyond 12 months. Offsetting these obligations, it had cash of CN¥12.9b as well as receivables valued at CN¥15.9b due within 12 months. So it actually has CN¥9.47b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Zhongtian Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jiangsu Zhongtian Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Jiangsu Zhongtian Technology saw its EBIT drop by 8.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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'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. While Jiangsu Zhongtian Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Jiangsu Zhongtian Technology's free cash flow amounted to 34% 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¥7.60b in net cash and a decent-looking balance sheet. So we are not troubled with Jiangsu Zhongtian Technology's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangsu Zhongtian Technology's earnings per share history for free.

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.