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 Jiangsu Tongli Risheng Machinery Co., Ltd. (SHSE:605286) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangsu Tongli Risheng Machinery's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Tongli Risheng Machinery had CN¥137.5m of debt in September 2024, down from CN¥462.5m, one year before. But on the other hand it also has CN¥564.0m in cash, leading to a CN¥426.5m net cash position.

A Look At Jiangsu Tongli Risheng Machinery's Liabilities

According to the last reported balance sheet, Jiangsu Tongli Risheng Machinery had liabilities of CN¥1.54b due within 12 months, and liabilities of CN¥127.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥564.0m as well as receivables valued at CN¥1.25b due within 12 months. So it actually has CN¥149.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Tongli Risheng Machinery could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Tongli Risheng Machinery boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jiangsu Tongli Risheng Machinery grew its EBIT by 122% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Tongli Risheng Machinery's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Tongli Risheng 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. Looking at the most recent three years, Jiangsu Tongli Risheng Machinery recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Tongli Risheng Machinery has CN¥426.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 122% year-on-year EBIT growth. So is Jiangsu Tongli Risheng Machinery's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for Jiangsu Tongli Risheng Machinery you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.