Here's Why Jianglong Shipbuilding (SZSE:300589) Can Manage Its Debt Responsibly

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 Jianglong Shipbuilding Co., Ltd. (SZSE:300589) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Jianglong Shipbuilding

How Much Debt Does Jianglong Shipbuilding Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jianglong Shipbuilding had debt of CN¥84.1m, up from CN¥27.2m in one year. But on the other hand it also has CN¥117.1m in cash, leading to a CN¥33.0m net cash position.

How Strong Is Jianglong Shipbuilding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jianglong Shipbuilding had liabilities of CN¥1.16b due within 12 months and liabilities of CN¥17.8m due beyond that. Offsetting these obligations, it had cash of CN¥117.1m as well as receivables valued at CN¥688.0m due within 12 months. So its liabilities total CN¥373.1m more than the combination of its cash and short-term receivables.

Of course, Jianglong Shipbuilding has a market capitalization of CN¥4.35b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jianglong Shipbuilding also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jianglong Shipbuilding turned things around in the last 12 months, delivering and EBIT of CN¥31m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jianglong Shipbuilding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jianglong Shipbuilding 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 year, Jianglong Shipbuilding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jianglong Shipbuilding has CN¥33.0m in net cash. So we don't have any problem with Jianglong Shipbuilding's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Jianglong Shipbuilding , and understanding them should be part of your investment process.

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.