Jiangsu Guomao Reducer (SHSE:603915) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Jiangsu Guomao Reducer Co., Ltd. (SHSE:603915) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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.

Check out our latest analysis for Jiangsu Guomao Reducer

What Is Jiangsu Guomao Reducer's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Guomao Reducer had CN¥15.0m of debt, an increase on none, over one year. However, it does have CN¥1.92b in cash offsetting this, leading to net cash of CN¥1.90b.

A Look At Jiangsu Guomao Reducer's Liabilities

According to the last reported balance sheet, Jiangsu Guomao Reducer had liabilities of CN¥1.51b due within 12 months, and liabilities of CN¥88.6m due beyond 12 months. On the other hand, it had cash of CN¥1.92b and CN¥856.5m worth of receivables due within a year. So it can boast CN¥1.18b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Guomao Reducer has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Guomao Reducer 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 Guomao Reducer saw its EBIT decline by 8.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Guomao Reducer'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Guomao Reducer 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, Jiangsu Guomao Reducer recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Guomao Reducer has net cash of CN¥1.90b, as well as more liquid assets than liabilities. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥641m. So is Jiangsu Guomao Reducer's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Jiangsu Guomao Reducer that you should be aware of before investing here.

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.