Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Jiang Su Suyan Jingshen Co.,Ltd (SHSE:603299) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Jiang Su Suyan JingshenLtd

What Is Jiang Su Suyan JingshenLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Jiang Su Suyan JingshenLtd had CN¥2.52b of debt, an increase on CN¥1.55b, over one year. But it also has CN¥3.38b in cash to offset that, meaning it has CN¥863.3m net cash.

A Look At Jiang Su Suyan JingshenLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiang Su Suyan JingshenLtd had liabilities of CN¥3.83b due within 12 months and liabilities of CN¥1.17b due beyond that. Offsetting these obligations, it had cash of CN¥3.38b as well as receivables valued at CN¥1.37b due within 12 months. So its liabilities total CN¥248.8m more than the combination of its cash and short-term receivables.

Since publicly traded Jiang Su Suyan JingshenLtd shares are worth a total of CN¥8.84b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jiang Su Suyan JingshenLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Jiang Su Suyan JingshenLtd grew its EBIT by 342% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiang Su Suyan JingshenLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiang Su Suyan JingshenLtd 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. Happily for any shareholders, Jiang Su Suyan JingshenLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiang Su Suyan JingshenLtd has CN¥863.3m in net cash. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in CN¥747m. So we don't think Jiang Su Suyan JingshenLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiang Su Suyan JingshenLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.