Is JiaoZuo WanFang Aluminum Manufacturing (SZSE:000612) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that JiaoZuo WanFang Aluminum Manufacturing Co., Ltd (SZSE:000612) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for JiaoZuo WanFang Aluminum Manufacturing

What Is JiaoZuo WanFang Aluminum Manufacturing's Net Debt?

As you can see below, JiaoZuo WanFang Aluminum Manufacturing had CN¥1.11b of debt at December 2023, down from CN¥1.45b a year prior. But on the other hand it also has CN¥1.74b in cash, leading to a CN¥626.8m net cash position.

How Strong Is JiaoZuo WanFang Aluminum Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JiaoZuo WanFang Aluminum Manufacturing had liabilities of CN¥1.88b due within 12 months and liabilities of CN¥221.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.74b as well as receivables valued at CN¥255.7m due within 12 months. So its liabilities total CN¥102.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that JiaoZuo WanFang Aluminum Manufacturing's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥9.78b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, JiaoZuo WanFang Aluminum Manufacturing also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, JiaoZuo WanFang Aluminum Manufacturing turned things around in the last 12 months, delivering and EBIT of CN¥479m. There's no doubt that we learn most about debt from the balance sheet. But it is JiaoZuo WanFang Aluminum Manufacturing's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. JiaoZuo WanFang Aluminum Manufacturing 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. Over the last year, JiaoZuo WanFang Aluminum Manufacturing actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JiaoZuo WanFang Aluminum Manufacturing has CN¥626.8m in net cash. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in CN¥802m. So we don't think JiaoZuo WanFang Aluminum Manufacturing's use of debt is risky. 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. Be aware that JiaoZuo WanFang Aluminum Manufacturing is showing 1 warning sign in our investment analysis , you should know about...

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.