Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 Jiangsu Zeyu Intelligent PowerLtd had debt of CN¥304.6m at the end of September 2024, a reduction from CN¥447.5m over a year. However, its balance sheet shows it holds CN¥2.10b in cash, so it actually has CN¥1.80b net cash.

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

According to the last reported balance sheet, Jiangsu Zeyu Intelligent PowerLtd had liabilities of CN¥772.9m due within 12 months, and liabilities of CN¥2.14m due beyond 12 months. Offsetting this, it had CN¥2.10b in cash and CN¥299.0m in receivables that were due within 12 months. So it actually has CN¥1.62b more liquid assets than total liabilities.

It's good to see that Jiangsu Zeyu Intelligent PowerLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Jiangsu Zeyu Intelligent PowerLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Jiangsu Zeyu Intelligent PowerLtd has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Zeyu Intelligent PowerLtd 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 company can only pay off debt with cold hard cash, not accounting profits. Jiangsu Zeyu Intelligent PowerLtd 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. In the last three years, Jiangsu Zeyu Intelligent PowerLtd created free cash flow amounting to 9.5% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay 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¥1.80b, as well as more liquid assets than liabilities. So we don't have any problem with Jiangsu Zeyu Intelligent PowerLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Jiangsu Zeyu Intelligent PowerLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.