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.' 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. As with many other companies Jiangsu Eazytec Co., Ltd. (SHSE:688258) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Jiangsu Eazytec Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangsu Eazytec had debt of CN¥256.8m, up from CN¥140.2m in one year. However, its balance sheet shows it holds CN¥402.6m in cash, so it actually has CN¥145.8m net cash.

A Look At Jiangsu Eazytec's Liabilities

The latest balance sheet data shows that Jiangsu Eazytec had liabilities of CN¥283.3m due within a year, and liabilities of CN¥158.5m falling due after that. Offsetting this, it had CN¥402.6m in cash and CN¥247.9m in receivables that were due within 12 months. So it actually has CN¥208.7m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Eazytec has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Eazytec has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Jiangsu Eazytec made a loss at the EBIT level, last year, it was also good to see that it generated CN¥61m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jiangsu Eazytec'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Eazytec 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. Over the last year, Jiangsu Eazytec recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Eazytec has net cash of CN¥145.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in CN¥57m. So is Jiangsu Eazytec's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangsu Eazytec's earnings per share history for free.

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.