The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Jiangsu ToLand Alloy Co.,Ltd (SZSE:300855) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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

What Is Jiangsu ToLand AlloyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu ToLand AlloyLtd had CN¥80.0m of debt in March 2024, down from CN¥147.4m, one year before. However, its balance sheet shows it holds CN¥251.4m in cash, so it actually has CN¥171.4m net cash.

A Look At Jiangsu ToLand AlloyLtd's Liabilities

We can see from the most recent balance sheet that Jiangsu ToLand AlloyLtd had liabilities of CN¥228.9m falling due within a year, and liabilities of CN¥122.0m due beyond that. Offsetting this, it had CN¥251.4m in cash and CN¥458.5m in receivables that were due within 12 months. So it can boast CN¥359.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu ToLand AlloyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu ToLand AlloyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Jiangsu ToLand AlloyLtd grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jiangsu ToLand AlloyLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu ToLand AlloyLtd 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. During the last three years, Jiangsu ToLand AlloyLtd burned a lot of cash. 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 Jiangsu ToLand AlloyLtd has net cash of CN¥171.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 18% year-on-year EBIT growth. So we don't have any problem with Jiangsu ToLand AlloyLtd's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu ToLand AlloyLtd is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.