Jiangsu Rainbow Heavy Industries (SZSE:002483) Has A Rock Solid 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. We can see that Jiangsu Rainbow Heavy Industries Co., Ltd. (SZSE:002483) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangsu Rainbow Heavy Industries

What Is Jiangsu Rainbow Heavy Industries's Net Debt?

As you can see below, Jiangsu Rainbow Heavy Industries had CN¥1.10b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥3.51b in cash offsetting this, leading to net cash of CN¥2.40b.

A Look At Jiangsu Rainbow Heavy Industries' Liabilities

The latest balance sheet data shows that Jiangsu Rainbow Heavy Industries had liabilities of CN¥6.23b due within a year, and liabilities of CN¥555.9m falling due after that. Offsetting these obligations, it had cash of CN¥3.51b as well as receivables valued at CN¥2.03b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.25b.

Jiangsu Rainbow Heavy Industries has a market capitalization of CN¥4.21b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Jiangsu Rainbow Heavy Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jiangsu Rainbow Heavy Industries grew its EBIT by 44% 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 it is future earnings, more than anything, that will determine Jiangsu Rainbow Heavy Industries'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. While Jiangsu Rainbow Heavy Industries 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, Jiangsu Rainbow Heavy Industries actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Jiangsu Rainbow Heavy Industries'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¥2.40b. And it impressed us with free cash flow of -CN¥426m, being 183% of its EBIT. So is Jiangsu Rainbow Heavy Industries'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jiangsu Rainbow Heavy Industries that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.