Warren Buffett famously said, '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. As with many other companies Jiangsu Lianyungang Port Co., Ltd. (SHSE:601008) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Jiangsu Lianyungang Port Carry?

The image below, which you can click on for greater detail, shows that Jiangsu Lianyungang Port had debt of CN¥1.60b at the end of September 2023, a reduction from CN¥1.81b over a year. However, it does have CN¥1.76b in cash offsetting this, leading to net cash of CN¥159.9m.

How Healthy Is Jiangsu Lianyungang Port's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Lianyungang Port had liabilities of CN¥3.98b due within 12 months and liabilities of CN¥682.6m due beyond that. Offsetting this, it had CN¥1.76b in cash and CN¥342.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.56b.

This deficit isn't so bad because Jiangsu Lianyungang Port is worth CN¥4.39b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Jiangsu Lianyungang Port boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Jiangsu Lianyungang Port has increased its EBIT by 2.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Lianyungang Port 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 Jiangsu Lianyungang Port 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, Jiangsu Lianyungang Port 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

Although Jiangsu Lianyungang Port's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥159.9m. And it impressed us with free cash flow of -CN¥81m, being 153% of its EBIT. So we don't have any problem with Jiangsu Lianyungang Port's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jiangsu Lianyungang Port you should know about.

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.