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.' 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. We can see that Jiangsu Gian Technology Co., Ltd. (SZSE:300709) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Jiangsu Gian Technology's Debt?
The image below, which you can click on for greater detail, shows that Jiangsu Gian Technology had debt of CN¥317.7m at the end of September 2023, a reduction from CN¥351.7m over a year. But on the other hand it also has CN¥593.9m in cash, leading to a CN¥276.2m net cash position.
How Healthy Is Jiangsu Gian Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Gian Technology had liabilities of CN¥1.14b due within 12 months and liabilities of CN¥124.1m due beyond that. Offsetting these obligations, it had cash of CN¥593.9m as well as receivables valued at CN¥686.9m due within 12 months. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Jiangsu Gian Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥5.17b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiangsu Gian Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Gian Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Jiangsu Gian Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 19%. We would much prefer see growth.
So How Risky Is Jiangsu Gian Technology?
Although Jiangsu Gian Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥276m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Jiangsu Gian Technology's profit, revenue, and operating cashflow have changed over the last few years.
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.