Is Jiangyin Electrical AlloyLtd (SZSE:300697) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Jiangyin Electrical Alloy Co.,Ltd (SZSE:300697) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangyin Electrical AlloyLtd

How Much Debt Does Jiangyin Electrical AlloyLtd Carry?

As you can see below, Jiangyin Electrical AlloyLtd had CN¥354.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥228.2m in cash offsetting this, leading to net debt of about CN¥126.0m.

How Strong Is Jiangyin Electrical AlloyLtd's Balance Sheet?

The latest balance sheet data shows that Jiangyin Electrical AlloyLtd had liabilities of CN¥609.8m due within a year, and liabilities of CN¥16.7m falling due after that. Offsetting these obligations, it had cash of CN¥228.2m as well as receivables valued at CN¥806.3m due within 12 months. So it actually has CN¥408.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangyin Electrical AlloyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jiangyin Electrical AlloyLtd's net debt is only 0.75 times its EBITDA. And its EBIT covers its interest expense a whopping 24.3 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Jiangyin Electrical AlloyLtd's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangyin Electrical AlloyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Jiangyin Electrical AlloyLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Jiangyin Electrical AlloyLtd's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its EBIT growth rate. Taking all this data into account, it seems to us that Jiangyin Electrical AlloyLtd takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. To that end, you should learn about the 2 warning signs we've spotted with Jiangyin Electrical AlloyLtd (including 1 which is a bit unpleasant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.