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.' 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 can see that Jiangsu Ankura Intelligent Power Co., Ltd. (SZSE:300617) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Ankura Intelligent Power's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Ankura Intelligent Power had CN¥239.3m of debt in March 2024, down from CN¥336.4m, one year before. However, its balance sheet shows it holds CN¥1.39b in cash, so it actually has CN¥1.15b net cash.

How Strong Is Jiangsu Ankura Intelligent Power's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Ankura Intelligent Power had liabilities of CN¥827.9m due within 12 months and liabilities of CN¥73.5m due beyond that. On the other hand, it had cash of CN¥1.39b and CN¥937.0m worth of receivables due within a year. So it actually has CN¥1.42b more liquid assets than total liabilities.

This surplus liquidity suggests that Jiangsu Ankura Intelligent Power's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Jiangsu Ankura Intelligent Power has more cash than debt is arguably a good indication that it can manage its debt safely.

While Jiangsu Ankura Intelligent Power doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Jiangsu Ankura Intelligent Power's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangsu Ankura Intelligent Power 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 three years, Jiangsu Ankura Intelligent Power burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Ankura Intelligent Power has net cash of CN¥1.15b, as well as more liquid assets than liabilities. So we are not troubled with Jiangsu Ankura Intelligent Power's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangsu Ankura Intelligent Power's earnings per share history for free.

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.