We Think Jiangsu Azure (SZSE:002245) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Azure Corporation (SZSE:002245) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangsu Azure

What Is Jiangsu Azure's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Azure had CN¥1.42b of debt in September 2024, down from CN¥1.72b, one year before. However, because it has a cash reserve of CN¥1.32b, its net debt is less, at about CN¥95.7m.

A Look At Jiangsu Azure's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Azure had liabilities of CN¥3.22b due within 12 months and liabilities of CN¥430.3m due beyond that. Offsetting this, it had CN¥1.32b in cash and CN¥2.12b in receivables that were due within 12 months. So it has liabilities totalling CN¥209.5m more than its cash and near-term receivables, combined.

Having regard to Jiangsu Azure's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥12.5b company is short on cash, but still worth keeping an eye on the balance sheet. But either way, Jiangsu Azure has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jiangsu Azure's net debt is only 0.15 times its EBITDA. And its EBIT easily covers its interest expense, being 152 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Although Jiangsu Azure made a loss at the EBIT level, last year, it was also good to see that it generated CN¥300m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Azure's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Jiangsu Azure produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

The good news is that Jiangsu Azure's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. When we consider the range of factors above, it looks like Jiangsu Azure is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. 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. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu Azure .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.