Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Nanjing Tanker Corporation (SHSE:601975) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nanjing Tanker

What Is Nanjing Tanker's Debt?

The chart below, which you can click on for greater detail, shows that Nanjing Tanker had CN¥1.86b in debt in September 2023; about the same as the year before. However, it does have CN¥2.84b in cash offsetting this, leading to net cash of CN¥978.2m.

How Strong Is Nanjing Tanker's Balance Sheet?

According to the last reported balance sheet, Nanjing Tanker had liabilities of CN¥1.12b due within 12 months, and liabilities of CN¥1.77b due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.84b as well as receivables valued at CN¥965.7m due within 12 months. So it actually has CN¥914.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Nanjing Tanker could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nanjing Tanker 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 Nanjing Tanker has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. 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 Nanjing Tanker can strengthen its balance sheet over time. 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. While Nanjing Tanker 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. During the last three years, Nanjing Tanker produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nanjing Tanker has CN¥978.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So is Nanjing Tanker'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 Nanjing Tanker, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.