Is Shenzhen Jieshun Science and Technology IndustryLtd (SZSE:002609) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Shenzhen Jieshun Science and Technology Industry Co.,Ltd. (SZSE:002609) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Shenzhen Jieshun Science and Technology IndustryLtd

How Much Debt Does Shenzhen Jieshun Science and Technology IndustryLtd Carry?

As you can see below, Shenzhen Jieshun Science and Technology IndustryLtd had CN¥221.3m of debt at September 2024, down from CN¥243.0m a year prior. However, it does have CN¥646.0m in cash offsetting this, leading to net cash of CN¥424.7m.

A Look At Shenzhen Jieshun Science and Technology IndustryLtd's Liabilities

The latest balance sheet data shows that Shenzhen Jieshun Science and Technology IndustryLtd had liabilities of CN¥852.6m due within a year, and liabilities of CN¥279.1m falling due after that. On the other hand, it had cash of CN¥646.0m and CN¥559.0m worth of receivables due within a year. So it actually has CN¥73.2m more liquid assets than total liabilities.

Having regard to Shenzhen Jieshun Science and Technology IndustryLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥4.92b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Shenzhen Jieshun Science and Technology IndustryLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Shenzhen Jieshun Science and Technology IndustryLtd has seen its EBIT plunge 10% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Jieshun Science and Technology IndustryLtd's earnings that will influence how the balance sheet holds up in the future. 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. Shenzhen Jieshun Science and Technology IndustryLtd 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. Happily for any shareholders, Shenzhen Jieshun Science and Technology IndustryLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Jieshun Science and Technology IndustryLtd has net cash of CN¥424.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥124m, being 194% of its EBIT. So we don't think Shenzhen Jieshun Science and Technology IndustryLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shenzhen Jieshun Science and Technology IndustryLtd (of which 1 is a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.