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 J.S. Corrugating Machinery Co., Ltd. (SZSE:000821) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does J.S. Corrugating Machinery Carry?

The chart below, which you can click on for greater detail, shows that J.S. Corrugating Machinery had CN¥1.04b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥2.31b in cash, so it actually has CN¥1.27b net cash.

How Healthy Is J.S. Corrugating Machinery's Balance Sheet?

According to the last reported balance sheet, J.S. Corrugating Machinery had liabilities of CN¥10.6b due within 12 months, and liabilities of CN¥601.0m due beyond 12 months. On the other hand, it had cash of CN¥2.31b and CN¥3.39b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.46b.

This deficit is considerable relative to its market capitalization of CN¥6.55b, so it does suggest shareholders should keep an eye on J.S. Corrugating Machinery's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, J.S. Corrugating Machinery also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that J.S. Corrugating Machinery has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine J.S. Corrugating Machinery'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. J.S. Corrugating Machinery 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, J.S. Corrugating Machinery actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While J.S. Corrugating Machinery does have more liabilities than liquid assets, it also has net cash of CN¥1.27b. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in CN¥900m. So we are not troubled with J.S. Corrugating Machinery's debt use. 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 2 warning signs for J.S. Corrugating Machinery you should know about.

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.