Here's Why Jiangsu Ruitai New Energy Materials (SZSE:301238) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Jiangsu Ruitai New Energy Materials Co., Ltd. (SZSE:301238) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Ruitai New Energy Materials

What Is Jiangsu Ruitai New Energy Materials's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Ruitai New Energy Materials had debt of CN¥1.40b, up from CN¥1.25b in one year. But it also has CN¥5.31b in cash to offset that, meaning it has CN¥3.91b net cash.

How Strong Is Jiangsu Ruitai New Energy Materials' Balance Sheet?

The latest balance sheet data shows that Jiangsu Ruitai New Energy Materials had liabilities of CN¥1.68b due within a year, and liabilities of CN¥666.0m falling due after that. On the other hand, it had cash of CN¥5.31b and CN¥1.30b worth of receivables due within a year. So it actually has CN¥4.27b more liquid assets than total liabilities.

This surplus strongly suggests that Jiangsu Ruitai New Energy Materials has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Jiangsu Ruitai New Energy Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jiangsu Ruitai New Energy Materials's load is not too heavy, because its EBIT was down 65% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Jiangsu Ruitai New Energy Materials 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Ruitai New Energy Materials 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. Considering the last three years, Jiangsu Ruitai New Energy Materials actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Ruitai New Energy Materials has net cash of CN¥3.91b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Ruitai New Energy Materials's debt use. 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. Case in point: We've spotted 3 warning signs for Jiangsu Ruitai New Energy Materials you should be aware of, and 1 of them doesn't sit too well with us.

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.