These 4 Measures Indicate That Jianglong Shipbuilding (SZSE:300589) Is Using Debt Reasonably Well

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.' 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 Jianglong Shipbuilding Co., Ltd. (SZSE:300589) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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 Jianglong Shipbuilding

What Is Jianglong Shipbuilding's Net Debt?

As you can see below, at the end of June 2024, Jianglong Shipbuilding had CN¥30.0m of debt, up from CN¥12.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥122.9m in cash, so it actually has CN¥92.8m net cash.

A Look At Jianglong Shipbuilding's Liabilities

The latest balance sheet data shows that Jianglong Shipbuilding had liabilities of CN¥1.12b due within a year, and liabilities of CN¥18.3m falling due after that. Offsetting this, it had CN¥122.9m in cash and CN¥649.9m in receivables that were due within 12 months. So its liabilities total CN¥365.3m more than the combination of its cash and short-term receivables.

Since publicly traded Jianglong Shipbuilding shares are worth a total of CN¥4.30b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jianglong Shipbuilding boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Jianglong Shipbuilding made a loss at the EBIT level, last year, it was also good to see that it generated CN¥24m in EBIT over the last twelve months. 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 Jianglong Shipbuilding'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jianglong Shipbuilding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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

We could understand if investors are concerned about Jianglong Shipbuilding's liabilities, but we can be reassured by the fact it has has net cash of CN¥92.8m. So we don't have any problem with Jianglong Shipbuilding'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. For example, we've discovered 1 warning sign for Jianglong Shipbuilding that you should be aware of before investing here.

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.