We Think Shandong Jinjing Science & Technology StockLtd (SHSE:600586) Can Stay On Top Of Its Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Shandong Jinjing Science & Technology Stock Co.,Ltd (SHSE:600586) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its 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 image below, which you can click on for greater detail, shows that at March 2024 Shandong Jinjing Science & Technology StockLtd had debt of CN¥2.61b, up from CN¥2.30b in one year. On the flip side, it has CN¥2.18b in cash leading to net debt of about CN¥431.0m.

A Look At Shandong Jinjing Science & Technology StockLtd's Liabilities

The latest balance sheet data shows that Shandong Jinjing Science & Technology StockLtd had liabilities of CN¥4.66b due within a year, and liabilities of CN¥881.7m falling due after that. On the other hand, it had cash of CN¥2.18b and CN¥1.04b worth of receivables due within a year. So it has liabilities totalling CN¥2.32b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Shandong Jinjing Science & Technology StockLtd has a market capitalization of CN¥8.28b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 0.32 times EBITDA, Shandong Jinjing Science & Technology StockLtd is arguably pretty conservatively geared. And it boasts interest cover of 7.2 times, which is more than adequate. In addition to that, we're happy to report that Shandong Jinjing Science & Technology StockLtd has boosted its EBIT by 72%, 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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Shandong Jinjing Science & Technology StockLtd recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Shandong Jinjing Science & Technology StockLtd's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Shandong Jinjing Science & Technology StockLtd's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. Case in point: We've spotted 1 warning sign for Shandong Jinjing Science & Technology StockLtd you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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