We Think Jiangsu Wujin Stainless Steel Pipe GroupLTD (SHSE:603878) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jiangsu Wujin Stainless Steel Pipe Group CO.,LTD. (SHSE:603878) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Wujin Stainless Steel Pipe GroupLTD

How Much Debt Does Jiangsu Wujin Stainless Steel Pipe GroupLTD Carry?

As you can see below, Jiangsu Wujin Stainless Steel Pipe GroupLTD had CN¥385.9m of debt at September 2024, down from CN¥498.3m a year prior. However, its balance sheet shows it holds CN¥911.9m in cash, so it actually has CN¥526.0m net cash.

A Look At Jiangsu Wujin Stainless Steel Pipe GroupLTD's Liabilities

The latest balance sheet data shows that Jiangsu Wujin Stainless Steel Pipe GroupLTD had liabilities of CN¥950.3m due within a year, and liabilities of CN¥345.0m falling due after that. On the other hand, it had cash of CN¥911.9m and CN¥935.8m worth of receivables due within a year. So it can boast CN¥552.4m more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Wujin Stainless Steel Pipe GroupLTD 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 Wujin Stainless Steel Pipe GroupLTD boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Jiangsu Wujin Stainless Steel Pipe GroupLTD's saving grace is its low debt levels, because its EBIT has tanked 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Wujin Stainless Steel Pipe GroupLTD 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, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Wujin Stainless Steel Pipe GroupLTD 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 Wujin Stainless Steel Pipe GroupLTD's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Wujin Stainless Steel Pipe GroupLTD has net cash of CN¥526.0m, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Wujin Stainless Steel Pipe GroupLTD's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu Wujin Stainless Steel Pipe GroupLTD .

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.