Is Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Jiangsu Zeyu Intelligent Power Co.,Ltd. (SZSE:301179) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jiangsu Zeyu Intelligent PowerLtd

How Much Debt Does Jiangsu Zeyu Intelligent PowerLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jiangsu Zeyu Intelligent PowerLtd had debt of CN¥532.7m, up from CN¥288.7m in one year. However, it does have CN¥2.54b in cash offsetting this, leading to net cash of CN¥2.01b.

How Strong Is Jiangsu Zeyu Intelligent PowerLtd's Balance Sheet?

The latest balance sheet data shows that Jiangsu Zeyu Intelligent PowerLtd had liabilities of CN¥1.13b due within a year, and liabilities of CN¥1.72m falling due after that. On the other hand, it had cash of CN¥2.54b and CN¥295.0m worth of receivables due within a year. So it can boast CN¥1.71b more liquid assets than total liabilities.

This luscious liquidity implies that Jiangsu Zeyu Intelligent PowerLtd's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Jiangsu Zeyu Intelligent PowerLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Jiangsu Zeyu Intelligent PowerLtd's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Zeyu Intelligent PowerLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Zeyu Intelligent PowerLtd 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. Looking at the most recent three years, Jiangsu Zeyu Intelligent PowerLtd recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Zeyu Intelligent PowerLtd has net cash of CN¥2.01b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Zeyu Intelligent PowerLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Jiangsu Zeyu Intelligent PowerLtd (1 is concerning) you should be aware of.

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.

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