These 4 Measures Indicate That Jiangsu Shagang (SZSE:002075) Is Using Debt Reasonably Well

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. Importantly, Jiangsu Shagang Co., Ltd. (SZSE:002075) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jiangsu Shagang

What Is Jiangsu Shagang's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangsu Shagang had CN¥7.23b of debt, an increase on CN¥2.66b, over one year. However, its balance sheet shows it holds CN¥10.3b in cash, so it actually has CN¥3.07b net cash.

A Look At Jiangsu Shagang's Liabilities

The latest balance sheet data shows that Jiangsu Shagang had liabilities of CN¥11.1b due within a year, and liabilities of CN¥525.8m falling due after that. Offsetting this, it had CN¥10.3b in cash and CN¥549.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥807.0m more than its cash and near-term receivables, combined.

Given Jiangsu Shagang has a market capitalization of CN¥10.8b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jiangsu Shagang also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Jiangsu Shagang's load is not too heavy, because its EBIT was down 53% over the last year. 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 you can't view debt in total isolation; since Jiangsu Shagang 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 Jiangsu Shagang 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, Jiangsu Shagang produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Jiangsu Shagang's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.07b. So we are not troubled with Jiangsu Shagang's debt use. 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. For example Jiangsu Shagang has 3 warning signs (and 1 which is a bit concerning) we think 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.