Jiangsu Cnano Technology (SHSE:688116) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Jiangsu Cnano Technology Co., Ltd. (SHSE:688116) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jiangsu Cnano Technology

How Much Debt Does Jiangsu Cnano Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu Cnano Technology had debt of CN¥1.24b, up from CN¥820.1m in one year. However, it does have CN¥1.29b in cash offsetting this, leading to net cash of CN¥52.3m.

A Look At Jiangsu Cnano Technology's Liabilities

We can see from the most recent balance sheet that Jiangsu Cnano Technology had liabilities of CN¥896.7m falling due within a year, and liabilities of CN¥1.16b due beyond that. On the other hand, it had cash of CN¥1.29b and CN¥954.3m worth of receivables due within a year. So it can boast CN¥194.9m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Cnano Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Cnano Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Jiangsu Cnano Technology's saving grace is its low debt levels, because its EBIT has tanked 40% 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. 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 Cnano Technology'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. Jiangsu Cnano Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Jiangsu Cnano Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Cnano Technology has net cash of CN¥52.3m, as well as more liquid assets than liabilities. So while Jiangsu Cnano Technology does not have a great balance sheet, it's certainly not too bad. 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. We've identified 1 warning sign with Jiangsu Cnano Technology , and understanding them should be part of your investment process.

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.

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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.