Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiayou International Logistics Co.,Ltd (SHSE:603871) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiayou International LogisticsLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jiayou International LogisticsLtd had debt of CN¥126.3m, up from none in one year. But on the other hand it also has CN¥1.71b in cash, leading to a CN¥1.58b net cash position.

How Strong Is Jiayou International LogisticsLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiayou International LogisticsLtd had liabilities of CN¥1.48b falling due within a year, and liabilities of CN¥48.2m due beyond that. On the other hand, it had cash of CN¥1.71b and CN¥534.5m worth of receivables due within a year. So it can boast CN¥709.2m more liquid assets than total liabilities.

This surplus suggests that Jiayou International LogisticsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jiayou International LogisticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Jiayou International LogisticsLtd has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiayou International LogisticsLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiayou International LogisticsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jiayou International LogisticsLtd reported free cash flow worth 17% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiayou International LogisticsLtd has CN¥1.58b in net cash and a decent-looking balance sheet. And we liked the look of last year's 47% year-on-year EBIT growth. So is Jiayou International LogisticsLtd's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Jiayou International LogisticsLtd .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.