Jilin Joinature PolymerLtd (SHSE:688716) Seems To Use Debt Quite Sensibly

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. As with many other companies Jilin Joinature Polymer Co.,Ltd. (SHSE:688716) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Jilin Joinature PolymerLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jilin Joinature PolymerLtd had debt of CN¥11.4m, up from CN¥2.60m in one year. But on the other hand it also has CN¥703.9m in cash, leading to a CN¥692.5m net cash position.

How Healthy Is Jilin Joinature PolymerLtd's Balance Sheet?

We can see from the most recent balance sheet that Jilin Joinature PolymerLtd had liabilities of CN¥69.8m falling due within a year, and liabilities of CN¥10.7m due beyond that. On the other hand, it had cash of CN¥703.9m and CN¥107.6m worth of receivables due within a year. So it can boast CN¥731.0m more liquid assets than total liabilities.

It's good to see that Jilin Joinature PolymerLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jilin Joinature PolymerLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Jilin Joinature PolymerLtd

Fortunately, Jilin Joinature PolymerLtd grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jilin Joinature PolymerLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jilin Joinature PolymerLtd 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, Jilin Joinature PolymerLtd 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 it is always sensible to investigate a company's debt, in this case Jilin Joinature PolymerLtd has CN¥692.5m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 5.1% in the last twelve months. So we don't have any problem with Jilin Joinature PolymerLtd's use of debt. 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. For example Jilin Joinature PolymerLtd has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.