These 4 Measures Indicate That Jiangsu ToLand AlloyLtd (SZSE:300855) Is Using Debt Reasonably Well

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 ToLand Alloy Co.,Ltd (SZSE:300855) 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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jiangsu ToLand AlloyLtd

How Much Debt Does Jiangsu ToLand AlloyLtd Carry?

The image below, which you can click on for greater detail, shows that Jiangsu ToLand AlloyLtd had debt of CN¥80.0m at the end of March 2024, a reduction from CN¥147.4m over a year. But on the other hand it also has CN¥251.4m in cash, leading to a CN¥171.4m net cash position.

How Strong Is Jiangsu ToLand AlloyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu ToLand AlloyLtd had liabilities of CN¥228.9m due within 12 months and liabilities of CN¥122.0m due beyond that. Offsetting these obligations, it had cash of CN¥251.4m as well as receivables valued at CN¥458.5m due within 12 months. So it actually has CN¥359.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu ToLand AlloyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu ToLand AlloyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jiangsu ToLand AlloyLtd grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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 ToLand AlloyLtd'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. 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. During the last three years, Jiangsu ToLand AlloyLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu ToLand AlloyLtd has net cash of CN¥171.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 18% over the last year. So we are not troubled with Jiangsu ToLand AlloyLtd'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, we've discovered 2 warning signs for Jiangsu ToLand AlloyLtd (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.