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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiangsu Eazytec Co., Ltd. (SHSE:688258) does carry debt. But is this debt a concern to shareholders?

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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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangsu Eazytec's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangsu Eazytec had debt of CN¥303.2m, up from CN¥255.3m in one year. However, it does have CN¥472.9m in cash offsetting this, leading to net cash of CN¥169.7m.

How Healthy 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 this, it had CN¥472.9m in cash and CN¥258.2m in receivables that were 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!

View our latest analysis for Jiangsu Eazytec

Better yet, Jiangsu Eazytec grew its EBIT by 362% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Eazytec can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu Eazytec 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 two years, 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¥169.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 406% 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Eazytec you should know about.

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.