Jiangsu Ruitai New Energy Materials (SZSE:301238) Has A Pretty 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.' 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. We can see that Jiangsu Ruitai New Energy Materials Co., Ltd. (SZSE:301238) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Ruitai New Energy Materials had CN¥1.62b of debt, an increase on CN¥493.0m, over one year. But it also has CN¥5.69b in cash to offset that, meaning it has CN¥4.07b net cash.

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

We can see from the most recent balance sheet that Jiangsu Ruitai New Energy Materials had liabilities of CN¥2.28b falling due within a year, and liabilities of CN¥812.6m due beyond that. On the other hand, it had cash of CN¥5.69b and CN¥1.91b worth of receivables due within a year. So it can boast CN¥4.50b more liquid assets than total liabilities.

This luscious liquidity implies that Jiangsu Ruitai New Energy Materials' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Jiangsu Ruitai New Energy Materials has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Jiangsu Ruitai New Energy Materials's saving grace is its low debt levels, because its EBIT has tanked 48% in the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Ruitai New Energy Materials 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 three years, Jiangsu Ruitai New Energy Materials recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥4.07b, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu Ruitai New Energy Materials's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Jiangsu Ruitai New Energy Materials (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com