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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that JINHUI LIQUOR Co., Ltd. (SHSE:603919) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is JINHUI LIQUOR's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 JINHUI LIQUOR had CN¥23.5m of debt, an increase on CN¥14.6m, over one year. But it also has CN¥771.3m in cash to offset that, meaning it has CN¥747.8m net cash.

A Look At JINHUI LIQUOR's Liabilities

The latest balance sheet data shows that JINHUI LIQUOR had liabilities of CN¥1.01b due within a year, and liabilities of CN¥45.2m falling due after that. Offsetting these obligations, it had cash of CN¥771.3m as well as receivables valued at CN¥186.0m due within 12 months. So its liabilities total CN¥98.3m more than the combination of its cash and short-term receivables.

Having regard to JINHUI LIQUOR's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥9.12b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, JINHUI LIQUOR boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that JINHUI LIQUOR has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JINHUI LIQUOR 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JINHUI LIQUOR 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 three years, JINHUI LIQUOR recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about JINHUI LIQUOR's liabilities, but we can be reassured by the fact it has has net cash of CN¥747.8m. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CN¥294m. So is JINHUI LIQUOR's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in JINHUI LIQUOR, you may well want to click here to check an interactive graph of its earnings per share history.

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.