Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Nantong Jianghai Capacitor Co. Ltd. (SZSE:002484) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Nantong Jianghai Capacitor Carry?
You can click the graphic below for the historical numbers, but it shows that Nantong Jianghai Capacitor had CN¥353.9m of debt in September 2024, down from CN¥374.9m, one year before. However, it does have CN¥994.3m in cash offsetting this, leading to net cash of CN¥640.4m.
How Strong Is Nantong Jianghai Capacitor's Balance Sheet?
According to the last reported balance sheet, Nantong Jianghai Capacitor had liabilities of CN¥1.45b due within 12 months, and liabilities of CN¥191.4m due beyond 12 months. On the other hand, it had cash of CN¥994.3m and CN¥2.09b worth of receivables due within a year. So it actually has CN¥1.44b more liquid assets than total liabilities.
This short term liquidity is a sign that Nantong Jianghai Capacitor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nantong Jianghai Capacitor has more cash than debt is arguably a good indication that it can manage its debt safely.
But the bad news is that Nantong Jianghai Capacitor has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nantong Jianghai Capacitor'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. Nantong Jianghai Capacitor 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. In the last three years, Nantong Jianghai Capacitor created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.
Summing Up
While it is always sensible to investigate a company's debt, in this case Nantong Jianghai Capacitor has CN¥640.4m in net cash and a decent-looking balance sheet. So we are not troubled with Nantong Jianghai Capacitor's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Nantong Jianghai Capacitor that you should be aware of.
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.