J.S. Corrugating Machinery (SZSE:000821) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that J.S. Corrugating Machinery Co., Ltd. (SZSE:000821) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for J.S. Corrugating Machinery

What Is J.S. Corrugating Machinery's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 J.S. Corrugating Machinery had debt of CN¥846.3m, up from CN¥665.6m in one year. However, it does have CN¥2.19b in cash offsetting this, leading to net cash of CN¥1.35b.

A Look At J.S. Corrugating Machinery's Liabilities

According to the last reported balance sheet, J.S. Corrugating Machinery had liabilities of CN¥11.6b due within 12 months, and liabilities of CN¥536.3m due beyond 12 months. On the other hand, it had cash of CN¥2.19b and CN¥3.75b worth of receivables due within a year. So it has liabilities totalling CN¥6.19b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥8.64b, so it does suggest shareholders should keep an eye on J.S. Corrugating Machinery's use of debt. 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!

Better yet, J.S. Corrugating Machinery grew its EBIT by 120% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 J.S. Corrugating Machinery'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 J.S. Corrugating Machinery 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. 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

Although J.S. Corrugating Machinery's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.35b. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in CN¥329m. So is J.S. Corrugating Machinery's debt a risk? It doesn't seem so to us. 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 J.S. Corrugating Machinery's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.