Does Jiangsu ToLand AlloyLtd (SZSE:300855) Have A Healthy 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.' 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. We can see that Jiangsu ToLand Alloy Co.,Ltd (SZSE:300855) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jiangsu ToLand AlloyLtd

What Is Jiangsu ToLand AlloyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu ToLand AlloyLtd had CN¥167.5m of debt, an increase on CN¥80.0m, over one year. But on the other hand it also has CN¥319.2m in cash, leading to a CN¥151.7m net cash position.

A Look At Jiangsu ToLand AlloyLtd's Liabilities

According to the last reported balance sheet, Jiangsu ToLand AlloyLtd had liabilities of CN¥371.3m due within 12 months, and liabilities of CN¥148.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥319.2m as well as receivables valued at CN¥554.9m due within 12 months. So it actually has CN¥353.9m more liquid assets than total liabilities.

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

While Jiangsu ToLand AlloyLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu ToLand AlloyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu ToLand AlloyLtd 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. Considering the last three years, Jiangsu ToLand AlloyLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu ToLand AlloyLtd has CN¥151.7m in net cash and a decent-looking balance sheet. So we don't have any problem with Jiangsu ToLand AlloyLtd's use of debt. 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 instance, we've identified 1 warning sign for Jiangsu ToLand AlloyLtd that you should be aware of.

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.