Jiangsu Libert (SHSE:605167) Has A Pretty Healthy Balance Sheet

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 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 Libert INC. (SHSE:605167) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangsu Libert

What Is Jiangsu Libert's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jiangsu Libert had CN¥172.8m of debt, an increase on CN¥131.5m, over one year. But it also has CN¥654.5m in cash to offset that, meaning it has CN¥481.7m net cash.

How Strong Is Jiangsu Libert's Balance Sheet?

According to the last reported balance sheet, Jiangsu Libert had liabilities of CN¥1.06b due within 12 months, and liabilities of CN¥156.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥654.5m as well as receivables valued at CN¥556.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Jiangsu Libert's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.01b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Jiangsu Libert also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Jiangsu Libert has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 Libert'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 Libert 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. Looking at the most recent three years, Jiangsu Libert recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiangsu Libert has CN¥481.7m in net cash. And it impressed us with its EBIT growth of 29% over the last year. So we don't think Jiangsu Libert's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Jiangsu Libert has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.