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

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 note that Nantong Jianghai Capacitor Co. Ltd. (SZSE:002484) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nantong Jianghai Capacitor

How Much Debt Does Nantong Jianghai Capacitor Carry?

As you can see below, Nantong Jianghai Capacitor had CN¥326.2m of debt at June 2024, down from CN¥375.9m a year prior. But on the other hand it also has CN¥1.09b in cash, leading to a CN¥761.8m net cash position.

How Strong Is Nantong Jianghai Capacitor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nantong Jianghai Capacitor had liabilities of CN¥1.49b due within 12 months and liabilities of CN¥200.0m due beyond that. Offsetting this, it had CN¥1.09b in cash and CN¥2.13b in receivables that were due within 12 months. So it actually has CN¥1.52b 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.

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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Nantong Jianghai Capacitor'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, 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 17% 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 we empathize with investors who find debt concerning, you should keep in mind that Nantong Jianghai Capacitor has net cash of CN¥761.8m, 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. 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, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.