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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jianglong Shipbuilding Co., Ltd. (SZSE:300589) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jianglong Shipbuilding's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Jianglong Shipbuilding had debt of CN¥30.0m, up from CN¥12.4m in one year. However, its balance sheet shows it holds CN¥122.9m in cash, so it actually has CN¥92.8m net cash.

How Strong Is Jianglong Shipbuilding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jianglong Shipbuilding had liabilities of CN¥1.12b due within 12 months and liabilities of CN¥18.3m due beyond that. Offsetting these obligations, it had cash of CN¥122.9m as well as receivables valued at CN¥649.9m due within 12 months. So it has liabilities totalling CN¥365.3m more than its cash and near-term receivables, combined.

Of course, Jianglong Shipbuilding has a market capitalization of CN¥3.89b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jianglong Shipbuilding boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Jianglong Shipbuilding turned things around in the last 12 months, delivering and EBIT of CN¥39m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jianglong Shipbuilding'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jianglong Shipbuilding 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, Jianglong Shipbuilding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Jianglong Shipbuilding's liabilities, but we can be reassured by the fact it has has net cash of CN¥92.8m. So we are not troubled with Jianglong Shipbuilding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Jianglong Shipbuilding has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.