Is Jiangsu Changhai Composite Materials (SZSE:300196) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Jiangsu Changhai Composite Materials Co., Ltd (SZSE:300196) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Changhai Composite Materials

How Much Debt Does Jiangsu Changhai Composite Materials Carry?

As you can see below, at the end of June 2024, Jiangsu Changhai Composite Materials had CN¥1.29b of debt, up from CN¥1.05b a year ago. Click the image for more detail. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥342.6m.

A Look At Jiangsu Changhai Composite Materials' Liabilities

According to the last reported balance sheet, Jiangsu Changhai Composite Materials had liabilities of CN¥1.45b due within 12 months, and liabilities of CN¥864.1m due beyond 12 months. On the other hand, it had cash of CN¥1.63b and CN¥857.0m worth of receivables due within a year. So it can boast CN¥175.8m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Changhai Composite Materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiangsu Changhai Composite Materials boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Jiangsu Changhai Composite Materials if management cannot prevent a repeat of the 50% cut to EBIT 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 it is future earnings, more than anything, that will determine Jiangsu Changhai Composite Materials'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, a company can only pay off debt with cold hard cash, not accounting profits. Jiangsu Changhai Composite Materials 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. During the last three years, Jiangsu Changhai Composite Materials burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Changhai Composite Materials has CN¥342.6m in net cash and a decent-looking balance sheet. So while Jiangsu Changhai Composite Materials does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jiangsu Changhai Composite Materials .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.