Is Jiangsu Ankura Intelligent Power (SZSE:300617) Using Too Much 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.' 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. As with many other companies Jiangsu Ankura Intelligent Power Co., Ltd. (SZSE:300617) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Ankura Intelligent Power

How Much Debt Does Jiangsu Ankura Intelligent Power Carry?

As you can see below, Jiangsu Ankura Intelligent Power had CN¥239.3m of debt at March 2024, down from CN¥336.4m a year prior. However, it does have CN¥1.39b in cash offsetting this, leading to net cash of CN¥1.15b.

How Strong Is Jiangsu Ankura Intelligent Power's Balance Sheet?

The latest balance sheet data shows that Jiangsu Ankura Intelligent Power had liabilities of CN¥827.9m due within a year, and liabilities of CN¥73.5m falling due after that. On the other hand, it had cash of CN¥1.39b and CN¥937.0m worth of receivables due within a year. So it can boast CN¥1.42b more liquid assets than total liabilities.

This surplus strongly suggests that Jiangsu Ankura Intelligent Power has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Jiangsu Ankura Intelligent Power has more cash than debt is arguably a good indication that it can manage its debt safely.

Jiangsu Ankura Intelligent Power's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu Ankura Intelligent Power 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu Ankura Intelligent Power 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, Jiangsu Ankura Intelligent Power 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 investigate a company's debt, in this case Jiangsu Ankura Intelligent Power has CN¥1.15b in net cash and a decent-looking balance sheet. So we are not troubled with Jiangsu Ankura Intelligent Power's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Jiangsu Ankura Intelligent Power 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.