We Think Jiangsu TongLin ElectricLtd (SZSE:301168) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jiangsu TongLin Electric Co.,Ltd. (SZSE:301168) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu TongLin ElectricLtd

What Is Jiangsu TongLin ElectricLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu TongLin ElectricLtd had debt of CN¥99.4m, up from CN¥19.8m in one year. But on the other hand it also has CN¥1.45b in cash, leading to a CN¥1.35b net cash position.

How Strong Is Jiangsu TongLin ElectricLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu TongLin ElectricLtd had liabilities of CN¥1.14b due within a year, and liabilities of CN¥42.0m falling due after that. Offsetting this, it had CN¥1.45b in cash and CN¥819.5m in receivables that were due within 12 months. So it actually has CN¥1.09b more liquid assets than total liabilities.

It's good to see that Jiangsu TongLin ElectricLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu TongLin ElectricLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiangsu TongLin ElectricLtd grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. 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 Jiangsu TongLin ElectricLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu TongLin ElectricLtd 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. In the last three years, Jiangsu TongLin ElectricLtd created free cash flow amounting to 3.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu TongLin ElectricLtd has net cash of CN¥1.35b, as well as more liquid assets than liabilities. And we liked the look of last year's 53% year-on-year EBIT growth. So is Jiangsu TongLin ElectricLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu TongLin ElectricLtd .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.