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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ZJLD Group Inc (HKG:6979) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is ZJLD Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 ZJLD Group had CN¥285.1m of debt, an increase on CN¥36.6m, over one year. But it also has CN¥6.11b in cash to offset that, meaning it has CN¥5.83b net cash.

How Strong Is ZJLD Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ZJLD Group had liabilities of CN¥4.82b due within 12 months and liabilities of CN¥42.8m due beyond that. Offsetting these obligations, it had cash of CN¥6.11b as well as receivables valued at CN¥331.6m due within 12 months. So it actually has CN¥1.58b more liquid assets than total liabilities.

This short term liquidity is a sign that ZJLD Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ZJLD Group has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that ZJLD Group grew its EBIT by 13% last year, making its debt load easier to handle. 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 ZJLD Group'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, a company can only pay off debt with cold hard cash, not accounting profits. ZJLD Group 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, ZJLD Group saw substantial negative free cash flow, in total. 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 it is always sensible to investigate a company's debt, in this case ZJLD Group has CN¥5.83b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 13% over the last year. So we don't have any problem with ZJLD Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for ZJLD Group (1 is a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.