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.' 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 note that Jiangsu Kuangshun Photosensitivity New-Material Stock Co., Ltd. (SZSE:300537) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Kuangshun Photosensitivity New-Material Stock's Net Debt?

As you can see below, Jiangsu Kuangshun Photosensitivity New-Material Stock had CN¥99.3m of debt at September 2024, down from CN¥149.0m a year prior. However, its balance sheet shows it holds CN¥132.7m in cash, so it actually has CN¥33.4m net cash.

A Look At Jiangsu Kuangshun Photosensitivity New-Material Stock's Liabilities

According to the last reported balance sheet, Jiangsu Kuangshun Photosensitivity New-Material Stock had liabilities of CN¥333.9m due within 12 months, and liabilities of CN¥11.7m due beyond 12 months. Offsetting this, it had CN¥132.7m in cash and CN¥338.8m in receivables that were due within 12 months. So it actually has CN¥125.9m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Kuangshun Photosensitivity New-Material Stock has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Kuangshun Photosensitivity New-Material Stock has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Jiangsu Kuangshun Photosensitivity New-Material Stock grew its EBIT by 100,958% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Kuangshun Photosensitivity New-Material Stock 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, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu Kuangshun Photosensitivity New-Material Stock 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 two years, Jiangsu Kuangshun Photosensitivity New-Material Stock burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Kuangshun Photosensitivity New-Material Stock has CN¥33.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 100,958% over the last year. So we don't have any problem with Jiangsu Kuangshun Photosensitivity New-Material Stock'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. For example, we've discovered 3 warning signs for Jiangsu Kuangshun Photosensitivity New-Material Stock (1 can't be ignored!) that you should be aware of before investing here.

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.