Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, J.S. Corrugating Machinery Co., Ltd. (SZSE:000821) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is J.S. Corrugating Machinery's Debt?

As you can see below, at the end of March 2024, J.S. Corrugating Machinery had CN¥872.5m of debt, up from CN¥730.3m a year ago. Click the image for more detail. But on the other hand it also has CN¥2.32b in cash, leading to a CN¥1.44b net cash position.

How Healthy Is J.S. Corrugating Machinery's Balance Sheet?

We can see from the most recent balance sheet that J.S. Corrugating Machinery had liabilities of CN¥10.9b falling due within a year, and liabilities of CN¥584.1m due beyond that. Offsetting this, it had CN¥2.32b in cash and CN¥3.62b in receivables that were due within 12 months. So it has liabilities totalling CN¥5.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥6.99b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, J.S. Corrugating Machinery also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that J.S. Corrugating Machinery has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine J.S. Corrugating Machinery'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. While J.S. Corrugating Machinery 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, J.S. Corrugating Machinery actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While J.S. Corrugating Machinery does have more liabilities than liquid assets, it also has net cash of CN¥1.44b. And it impressed us with free cash flow of CN¥453m, being 102% of its EBIT. So is J.S. Corrugating Machinery's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - J.S. Corrugating Machinery has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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