Here's Why Nantong Jianghai Capacitor (SZSE:002484) Can Manage Its Debt Responsibly

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.' 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 note that Nantong Jianghai Capacitor Co. Ltd. (SZSE:002484) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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.

See our latest analysis for Nantong Jianghai Capacitor

What Is Nantong Jianghai Capacitor's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nantong Jianghai Capacitor had CN¥353.9m of debt in September 2024, down from CN¥374.9m, one year before. However, it does have CN¥994.3m in cash offsetting this, leading to net cash of CN¥640.4m.

How Healthy Is Nantong Jianghai Capacitor's Balance Sheet?

We can see from the most recent balance sheet that Nantong Jianghai Capacitor had liabilities of CN¥1.45b falling due within a year, and liabilities of CN¥191.4m due beyond that. Offsetting these obligations, it had cash of CN¥994.3m as well as receivables valued at CN¥2.09b due within 12 months. So it can boast CN¥1.44b more liquid assets than total liabilities.

This short term liquidity is a sign that Nantong Jianghai Capacitor could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nantong Jianghai Capacitor boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Nantong Jianghai Capacitor's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nantong Jianghai Capacitor 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nantong Jianghai Capacitor 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, Nantong Jianghai Capacitor reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nantong Jianghai Capacitor has net cash of CN¥640.4m, as well as more liquid assets than liabilities. So we don't have any problem with Nantong Jianghai Capacitor's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nantong Jianghai Capacitor you should know about.

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.