We Think JiaoZuo WanFang Aluminum Manufacturing (SZSE:000612) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies JiaoZuo WanFang Aluminum Manufacturing Co., Ltd (SZSE:000612) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that JiaoZuo WanFang Aluminum Manufacturing had CN¥733.1m of debt in June 2024, down from CN¥1.48b, one year before. However, its balance sheet shows it holds CN¥1.55b in cash, so it actually has CN¥815.1m net cash.

A Look At JiaoZuo WanFang Aluminum Manufacturing's Liabilities

We can see from the most recent balance sheet that JiaoZuo WanFang Aluminum Manufacturing had liabilities of CN¥1.53b falling due within a year, and liabilities of CN¥185.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.55b as well as receivables valued at CN¥160.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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¥6.68b 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¥742m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While JiaoZuo WanFang Aluminum Manufacturing 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. 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¥815.1m in net cash. The cherry on top was that in converted 161% of that EBIT to free cash flow, bringing in CN¥1.2b. So is JiaoZuo WanFang Aluminum Manufacturing's debt a risk? It doesn't seem so to us. 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. Be aware that JiaoZuo WanFang Aluminum Manufacturing is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.