Shandong Jinjing Science & Technology StockLtd (SHSE:600586) Has A Rock Solid Balance Sheet

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. We can see that Shandong Jinjing Science & Technology Stock Co.,Ltd (SHSE:600586) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shandong Jinjing Science & Technology StockLtd

How Much Debt Does Shandong Jinjing Science & Technology StockLtd Carry?

The chart below, which you can click on for greater detail, shows that Shandong Jinjing Science & Technology StockLtd had CN¥2.30b in debt in June 2024; about the same as the year before. But it also has CN¥2.35b in cash to offset that, meaning it has CN¥51.1m net cash.

How Strong Is Shandong Jinjing Science & Technology StockLtd's Balance Sheet?

We can see from the most recent balance sheet that Shandong Jinjing Science & Technology StockLtd had liabilities of CN¥4.63b falling due within a year, and liabilities of CN¥889.6m due beyond that. Offsetting this, it had CN¥2.35b in cash and CN¥915.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.25b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shandong Jinjing Science & Technology StockLtd is worth CN¥8.35b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Shandong Jinjing Science & Technology StockLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Shandong Jinjing Science & Technology StockLtd has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shandong Jinjing Science & Technology StockLtd can strengthen its balance sheet over time. 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. Shandong Jinjing Science & Technology StockLtd 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, Shandong Jinjing Science & Technology StockLtd recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Shandong Jinjing Science & Technology StockLtd does have more liabilities than liquid assets, it also has net cash of CN¥51.1m. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥587m. So we don't think Shandong Jinjing Science & Technology StockLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shandong Jinjing Science & Technology StockLtd is showing 2 warning signs in our investment analysis , you should know about...

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.