These 4 Measures Indicate That Jiangsu Dingsheng New Materials Ltd (SHSE:603876) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Jiangsu Dingsheng New Materials Joint-Stock Co.,Ltd (SHSE:603876) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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.

Check out our latest analysis for Jiangsu Dingsheng New Materials Ltd

What Is Jiangsu Dingsheng New Materials Ltd's Net Debt?

The chart below, which you can click on for greater detail, shows that Jiangsu Dingsheng New Materials Ltd had CN¥7.05b in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds CN¥7.42b in cash, so it actually has CN¥367.9m net cash.

How Healthy Is Jiangsu Dingsheng New Materials Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Dingsheng New Materials Ltd had liabilities of CN¥16.9b due within 12 months and liabilities of CN¥1.88b due beyond that. Offsetting this, it had CN¥7.42b in cash and CN¥4.40b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.97b.

This deficit is considerable relative to its market capitalization of CN¥8.42b, so it does suggest shareholders should keep an eye on Jiangsu Dingsheng New Materials Ltd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Jiangsu Dingsheng New Materials Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Jiangsu Dingsheng New Materials Ltd's load is not too heavy, because its EBIT was down 68% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Dingsheng New Materials Ltd's ability to maintain a healthy balance sheet going forward. 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 Dingsheng New Materials Ltd 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. During the last three years, Jiangsu Dingsheng New Materials Ltd produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Jiangsu Dingsheng New Materials Ltd does have more liabilities than liquid assets, it also has net cash of CN¥367.9m. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in -CN¥69m. So we are not troubled with Jiangsu Dingsheng New Materials Ltd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jiangsu Dingsheng New Materials Ltd 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.