These 4 Measures Indicate That Jiang Su Suyan JingshenLtd (SHSE:603299) Is Using Debt Safely

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 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 Jiang Su Suyan Jingshen Co.,Ltd (SHSE:603299) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiang Su Suyan JingshenLtd

What Is Jiang Su Suyan JingshenLtd's Debt?

As you can see below, Jiang Su Suyan JingshenLtd had CN¥2.16b of debt at June 2024, down from CN¥2.43b a year prior. However, its balance sheet shows it holds CN¥4.10b in cash, so it actually has CN¥1.94b net cash.

How Healthy Is Jiang Su Suyan JingshenLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiang Su Suyan JingshenLtd had liabilities of CN¥3.36b falling due within a year, and liabilities of CN¥1.32b due beyond that. Offsetting these obligations, it had cash of CN¥4.10b as well as receivables valued at CN¥798.6m due within 12 months. So it can boast CN¥211.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiang Su Suyan JingshenLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jiang Su Suyan JingshenLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Jiang Su Suyan JingshenLtd saw its EBIT drop by 4.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiang Su Suyan JingshenLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiang Su Suyan JingshenLtd 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. Over the last three years, Jiang Su Suyan JingshenLtd recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiang Su Suyan JingshenLtd has net cash of CN¥1.94b, as well as more liquid assets than liabilities. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in CN¥792m. So is Jiang Su Suyan JingshenLtd's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Jiang Su Suyan JingshenLtd you should be aware of.

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.