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.' 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 note that Jilin Expressway Co., Ltd. (SHSE:601518) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jilin Expressway

What Is Jilin Expressway's Net Debt?

As you can see below, at the end of September 2023, Jilin Expressway had CN¥12.8m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.42b in cash, so it actually has CN¥1.40b net cash.

How Healthy Is Jilin Expressway's Balance Sheet?

According to the last reported balance sheet, Jilin Expressway had liabilities of CN¥1.36b due within 12 months, and liabilities of CN¥4.11m due beyond 12 months. On the other hand, it had cash of CN¥1.42b and CN¥210.7m worth of receivables due within a year. So it actually has CN¥263.5m more liquid assets than total liabilities.

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

Also positive, Jilin Expressway grew its EBIT by 20% in the last year, and that should make it 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 Jilin Expressway will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jilin Expressway 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, Jilin Expressway actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jilin Expressway has net cash of CN¥1.40b, as well as more liquid assets than liabilities. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in CN¥1.2b. So is Jilin Expressway's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Jilin Expressway, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.