We Think Jiangsu Zhongtian Technology (SHSE:600522) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Jiangsu Zhongtian Technology Co., Ltd. (SHSE:600522) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Zhongtian Technology

How Much Debt Does Jiangsu Zhongtian Technology Carry?

The chart below, which you can click on for greater detail, shows that Jiangsu Zhongtian Technology had CN¥5.34b in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥12.9b in cash, leading to a CN¥7.60b net cash position.

How Strong 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¥17.2b due within 12 months and liabilities of CN¥2.12b due beyond that. Offsetting this, it had CN¥12.9b in cash and CN¥15.9b in receivables that were due within 12 months. So it can boast CN¥9.46b 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!

But the other side of the story is that Jiangsu Zhongtian Technology saw its EBIT decline by 8.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 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. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.