Jiangsu Changbao SteeltubeLtd (SZSE:002478) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jiangsu Changbao Steeltube Co.,Ltd (SZSE:002478) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu Changbao SteeltubeLtd

How Much Debt Does Jiangsu Changbao SteeltubeLtd Carry?

The image below, which you can click on for greater detail, shows that Jiangsu Changbao SteeltubeLtd had debt of CN¥150.0m at the end of September 2023, a reduction from CN¥281.1m over a year. However, its balance sheet shows it holds CN¥2.18b in cash, so it actually has CN¥2.03b net cash.

How Healthy Is Jiangsu Changbao SteeltubeLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu Changbao SteeltubeLtd had liabilities of CN¥2.54b due within a year, and liabilities of CN¥51.8m falling due after that. Offsetting these obligations, it had cash of CN¥2.18b as well as receivables valued at CN¥1.65b due within 12 months. So it actually has CN¥1.24b more liquid assets than total liabilities.

This surplus suggests that Jiangsu Changbao SteeltubeLtd is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu Changbao SteeltubeLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jiangsu Changbao SteeltubeLtd grew its EBIT by 146% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jiangsu Changbao SteeltubeLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangsu Changbao SteeltubeLtd 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. Looking at the most recent three years, Jiangsu Changbao SteeltubeLtd recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Changbao SteeltubeLtd has CN¥2.03b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 146% over the last year. So we don't think Jiangsu Changbao SteeltubeLtd's use of debt is risky. 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. We've identified 1 warning sign with Jiangsu Changbao SteeltubeLtd , and understanding them should be part of your investment process.

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.