We Think Jiangsu Evergreen New Material Technology (SHSE:603125) 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.' 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 can see that Jiangsu Evergreen New Material Technology Incorporated Company (SHSE:603125) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangsu Evergreen New Material Technology

What Is Jiangsu Evergreen New Material Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Evergreen New Material Technology had CN¥28.0m of debt, an increase on CN¥25.5m, over one year. However, its balance sheet shows it holds CN¥1.02b in cash, so it actually has CN¥988.8m net cash.

How Healthy Is Jiangsu Evergreen New Material Technology's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Evergreen New Material Technology had liabilities of CN¥75.8m falling due within a year, and liabilities of CN¥17.7m due beyond that. On the other hand, it had cash of CN¥1.02b and CN¥423.8m worth of receivables due within a year. So it can boast CN¥1.35b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Evergreen New Material Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jiangsu Evergreen New Material Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Jiangsu Evergreen New Material Technology's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Evergreen New Material Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Evergreen New Material Technology 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 Evergreen New Material Technology created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Evergreen New Material Technology has net cash of CN¥988.8m, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu Evergreen New Material Technology's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jiangsu Evergreen New Material Technology (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.