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 Jinan Shengquan Group Share Holding Co., Ltd. (SHSE:605589) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Jinan Shengquan Group Share Holding Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Jinan Shengquan Group Share Holding had debt of CN¥1.46b, up from CN¥1.17b in one year. But it also has CN¥1.86b in cash to offset that, meaning it has CN¥398.9m net cash.

How Strong Is Jinan Shengquan Group Share Holding's Balance Sheet?

The latest balance sheet data shows that Jinan Shengquan Group Share Holding had liabilities of CN¥3.54b due within a year, and liabilities of CN¥602.7m falling due after that. Offsetting this, it had CN¥1.86b in cash and CN¥3.05b in receivables that were due within 12 months. So it can boast CN¥762.2m more liquid assets than total liabilities.

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

Also good is that Jinan Shengquan Group Share Holding grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jinan Shengquan Group Share Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jinan Shengquan Group Share Holding 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. Over the last three years, Jinan Shengquan Group Share Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jinan Shengquan Group Share Holding has net cash of CN¥398.9m, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with Jinan Shengquan Group Share Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jinan Shengquan Group Share Holding .

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.