Jiangsu United Water TechnologyLtd (SHSE:603291) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Jiangsu United Water Technology Co.,Ltd. (SHSE:603291) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jiangsu United Water TechnologyLtd

How Much Debt Does Jiangsu United Water TechnologyLtd Carry?

The chart below, which you can click on for greater detail, shows that Jiangsu United Water TechnologyLtd had CN¥856.7m in debt in September 2024; about the same as the year before. However, it also had CN¥140.1m in cash, and so its net debt is CN¥716.6m.

How Healthy Is Jiangsu United Water TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu United Water TechnologyLtd had liabilities of CN¥740.5m due within 12 months and liabilities of CN¥1.14b due beyond that. On the other hand, it had cash of CN¥140.1m and CN¥448.7m worth of receivables due within a year. So its liabilities total CN¥1.29b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jiangsu United Water TechnologyLtd is worth CN¥5.76b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Jiangsu United Water TechnologyLtd has net debt worth 2.2 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.0 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Shareholders should be aware that Jiangsu United Water TechnologyLtd's EBIT was down 28% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangsu United Water TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Jiangsu United Water TechnologyLtd created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

We'd go so far as to say Jiangsu United Water TechnologyLtd's EBIT growth rate was disappointing. But at least its level of total liabilities is not so bad. It's also worth noting that Jiangsu United Water TechnologyLtd is in the Water Utilities industry, which is often considered to be quite defensive. Once we consider all the factors above, together, it seems to us that Jiangsu United Water TechnologyLtd's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Jiangsu United Water TechnologyLtd 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.