Does Jiangsu Gian Technology (SZSE:300709) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Jiangsu Gian Technology Co., Ltd. (SZSE:300709) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Jiangsu Gian Technology

What Is Jiangsu Gian Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Gian Technology had CN¥102.9m of debt in June 2024, down from CN¥314.6m, one year before. However, its balance sheet shows it holds CN¥547.7m in cash, so it actually has CN¥444.8m net cash.

A Look At Jiangsu Gian Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Gian Technology had liabilities of CN¥1.07b due within 12 months and liabilities of CN¥108.2m due beyond that. Offsetting this, it had CN¥547.7m in cash and CN¥814.2m in receivables that were due within 12 months. So it actually has CN¥179.8m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Gian Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Gian Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Jiangsu Gian Technology turned things around in the last 12 months, delivering and EBIT of CN¥241m. 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 Jiangsu Gian Technology'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Gian Technology 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, Jiangsu Gian Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Gian Technology has CN¥444.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in CN¥295m. So we don't think Jiangsu Gian Technology's use of debt is risky. 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. For example - Jiangsu Gian Technology has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.