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. We note that Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Jianshe Industry Group (Yunnan)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jianshe Industry Group (Yunnan) had CN¥256.0m of debt, an increase on CN¥120.0m, over one year. But it also has CN¥1.76b in cash to offset that, meaning it has CN¥1.51b net cash.

How Healthy Is Jianshe Industry Group (Yunnan)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jianshe Industry Group (Yunnan) had liabilities of CN¥3.73b due within 12 months and liabilities of CN¥644.1m due beyond that. Offsetting this, it had CN¥1.76b in cash and CN¥1.53b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.08b.

Given Jianshe Industry Group (Yunnan) has a market capitalization of CN¥10.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jianshe Industry Group (Yunnan) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Jianshe Industry Group (Yunnan) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥96m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jianshe Industry Group (Yunnan) will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jianshe Industry Group (Yunnan) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Jianshe Industry Group (Yunnan) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jianshe Industry Group (Yunnan)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.51b. And it impressed us with free cash flow of CN¥284m, being 296% of its EBIT. So we don't think Jianshe Industry Group (Yunnan)'s use of debt is risky. 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 Jianshe Industry Group (Yunnan)'s earnings per share history for free.

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.