David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Jinzai Food Group Co.,Ltd. (SZSE:003000) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jinzai Food GroupLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jinzai Food GroupLtd had CN¥70.0m of debt, an increase on CN¥50.0m, over one year. However, its balance sheet shows it holds CN¥556.7m in cash, so it actually has CN¥486.7m net cash.

How Healthy Is Jinzai Food GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jinzai Food GroupLtd had liabilities of CN¥360.3m due within 12 months and liabilities of CN¥32.5m due beyond that. Offsetting this, it had CN¥556.7m in cash and CN¥10.2m in receivables that were due within 12 months. So it actually has CN¥174.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Jinzai Food GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jinzai Food GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Jinzai Food GroupLtd grew its EBIT by 72% over the last twelve months, and that growth will make it easier to handle its debt. 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 Jinzai Food GroupLtd's ability to maintain a healthy balance sheet going forward. 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. While Jinzai Food GroupLtd 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. Looking at the most recent three years, Jinzai Food GroupLtd recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jinzai Food GroupLtd has CN¥486.7m in net cash and a decent-looking balance sheet. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think Jinzai Food GroupLtd's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Jinzai Food GroupLtd you should be aware of, and 1 of them can't be ignored.

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.

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