Jiangsu Nata Opto-electronic Material (SZSE:300346) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Nata Opto-electronic Material Co., Ltd. (SZSE:300346) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jiangsu Nata Opto-electronic Material

What Is Jiangsu Nata Opto-electronic Material's Debt?

As you can see below, at the end of September 2023, Jiangsu Nata Opto-electronic Material had CN¥1.33b of debt, up from CN¥455.7m a year ago. Click the image for more detail. However, it does have CN¥1.59b in cash offsetting this, leading to net cash of CN¥263.2m.

A Look At Jiangsu Nata Opto-electronic Material's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Nata Opto-electronic Material had liabilities of CN¥1.09b due within 12 months and liabilities of CN¥1.85b due beyond that. On the other hand, it had cash of CN¥1.59b and CN¥665.4m worth of receivables due within a year. So it has liabilities totalling CN¥691.6m more than its cash and near-term receivables, combined.

Since publicly traded Jiangsu Nata Opto-electronic Material shares are worth a total of CN¥13.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Jiangsu Nata Opto-electronic Material also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Jiangsu Nata Opto-electronic Material if management cannot prevent a repeat of the 49% 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Nata Opto-electronic Material's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu Nata Opto-electronic Material 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 three years, Jiangsu Nata Opto-electronic Material saw substantial negative free cash flow, in total. 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 look at a company's total liabilities, it is very reassuring that Jiangsu Nata Opto-electronic Material has CN¥263.2m in net cash. So while Jiangsu Nata Opto-electronic Material does not have a great balance sheet, it's certainly not too bad. 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 Jiangsu Nata Opto-electronic Material 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.