Is Jiangsu Eazytec (SHSE:688258) Using Too Much Debt?

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.' 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 note that Jiangsu Eazytec Co., Ltd. (SHSE:688258) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Eazytec

What Is Jiangsu Eazytec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Eazytec had CN¥301.6m of debt, an increase on CN¥254.2m, over one year. But it also has CN¥472.9m in cash to offset that, meaning it has CN¥171.4m net cash.

How Strong Is Jiangsu Eazytec's Balance Sheet?

According to the last reported balance sheet, Jiangsu Eazytec had liabilities of CN¥356.0m due within 12 months, and liabilities of CN¥136.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥472.9m as well as receivables valued at CN¥258.2m due within 12 months. So it can boast CN¥238.7m more liquid assets than total liabilities.

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

We also note that Jiangsu Eazytec improved its EBIT from a last year's loss to a positive CN¥3.3m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Eazytec will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Eazytec 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. Over the last year, Jiangsu Eazytec actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Eazytec has net cash of CN¥171.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 2,411% of that EBIT to free cash flow, bringing in CN¥79m. So is Jiangsu Eazytec's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Jiangsu Eazytec (1 can't be ignored) 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.