We Think Nantong Jianghai Capacitor (SZSE:002484) Can Stay On Top Of Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Nantong Jianghai Capacitor Co. Ltd. (SZSE:002484) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nantong Jianghai Capacitor

How Much Debt Does Nantong Jianghai Capacitor Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Nantong Jianghai Capacitor had debt of CN¥365.0m, up from CN¥336.9m in one year. However, it does have CN¥1.10b in cash offsetting this, leading to net cash of CN¥735.6m.

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¥1.46b falling due within a year, and liabilities of CN¥252.3m due beyond that. On the other hand, it had cash of CN¥1.10b and CN¥1.89b worth of receivables due within a year. So it actually has CN¥1.27b 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. Simply put, the fact that Nantong Jianghai Capacitor has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Nantong Jianghai Capacitor saw its EBIT decline by 4.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 11% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nantong Jianghai Capacitor has CN¥735.6m in net cash and a decent-looking balance sheet. So we are not troubled with Nantong Jianghai Capacitor's debt use. 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 - Nantong Jianghai Capacitor has 1 warning sign we think you should be aware of.

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.