Is Jiangsu Yangdian Science & Technology (SZSE:301012) 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. Importantly, Jiangsu Yangdian Science & Technology Co. Ltd. (SZSE:301012) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Yangdian Science & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Yangdian Science & Technology had CN¥288.0m of debt, an increase on CN¥173.8m, over one year. However, its balance sheet shows it holds CN¥312.5m in cash, so it actually has CN¥24.5m net cash.

How Healthy Is Jiangsu Yangdian Science & Technology's Balance Sheet?

The latest balance sheet data shows that Jiangsu Yangdian Science & Technology had liabilities of CN¥490.9m due within a year, and liabilities of CN¥3.96m falling due after that. Offsetting these obligations, it had cash of CN¥312.5m as well as receivables valued at CN¥669.4m due within 12 months. So it actually has CN¥487.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Yangdian Science & Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jiangsu Yangdian Science & Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Jiangsu Yangdian Science & Technology

Although Jiangsu Yangdian Science & Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥61m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Yangdian Science & Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Yangdian Science & Technology 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, Jiangsu Yangdian Science & Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Yangdian Science & Technology has net cash of CN¥24.5m, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu Yangdian Science & Technology's use of debt. 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, we've discovered 1 warning sign for Jiangsu Yangdian Science & Technology 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.