Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiangsu Zongyi Co.,LTD (SHSE:600770) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jiangsu ZongyiLTD

How Much Debt Does Jiangsu ZongyiLTD Carry?

You can click the graphic below for the historical numbers, but it shows that Jiangsu ZongyiLTD had CN¥347.0m of debt in March 2023, down from CN¥399.8m, one year before. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥1.28b.

A Look At Jiangsu ZongyiLTD's Liabilities

We can see from the most recent balance sheet that Jiangsu ZongyiLTD had liabilities of CN¥533.4m falling due within a year, and liabilities of CN¥325.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.63b as well as receivables valued at CN¥169.1m due within 12 months. So it actually has CN¥937.2m more liquid assets than total liabilities.

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

It was also good to see that despite losing money on the EBIT line last year, Jiangsu ZongyiLTD turned things around in the last 12 months, delivering and EBIT of CN¥9.1m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu ZongyiLTD will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jiangsu ZongyiLTD 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. Happily for any shareholders, Jiangsu ZongyiLTD actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu ZongyiLTD has net cash of CN¥1.28b, as well as more liquid assets than liabilities. The cherry on top was that in converted 1,063% of that EBIT to free cash flow, bringing in CN¥97m. So we don't think Jiangsu ZongyiLTD's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Jiangsu ZongyiLTD .

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.