Does J.S. Corrugating Machinery (SZSE:000821) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. Importantly, J.S. Corrugating Machinery Co., Ltd. (SZSE:000821) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for J.S. Corrugating Machinery

How Much Debt Does J.S. Corrugating Machinery Carry?

As you can see below, at the end of March 2024, J.S. Corrugating Machinery had CN¥872.5m of debt, up from CN¥730.3m a year ago. Click the image for more detail. However, it does have CN¥2.32b in cash offsetting this, leading to net cash of CN¥1.44b.

How Strong Is J.S. Corrugating Machinery's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J.S. Corrugating Machinery had liabilities of CN¥10.9b due within 12 months and liabilities of CN¥584.1m due beyond that. Offsetting these obligations, it had cash of CN¥2.32b as well as receivables valued at CN¥3.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.59b.

This is a mountain of leverage relative to its market capitalization of CN¥6.39b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, J.S. Corrugating Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, J.S. Corrugating Machinery grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 J.S. Corrugating Machinery 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. J.S. Corrugating Machinery 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, J.S. Corrugating Machinery actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While J.S. Corrugating Machinery does have more liabilities than liquid assets, it also has net cash of CN¥1.44b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in CN¥453m. So is J.S. Corrugating Machinery's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for J.S. Corrugating Machinery you should be aware of.

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.