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.' 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. As with many other companies Jiangsu Asia-Pacific Light Alloy Technology Co., Ltd. (SZSE:002540) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Jiangsu Asia-Pacific Light Alloy Technology's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jiangsu Asia-Pacific Light Alloy Technology had CN¥1.14b of debt, an increase on CN¥1.08b, over one year. However, it does have CN¥1.67b in cash offsetting this, leading to net cash of CN¥527.9m.
How Healthy Is Jiangsu Asia-Pacific Light Alloy Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jiangsu Asia-Pacific Light Alloy Technology had liabilities of CN¥717.4m due within 12 months and liabilities of CN¥1.22b due beyond that. Offsetting this, it had CN¥1.67b in cash and CN¥2.25b in receivables that were due within 12 months. So it can boast CN¥1.98b more liquid assets than total liabilities.
This surplus suggests that Jiangsu Asia-Pacific Light Alloy Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jiangsu Asia-Pacific Light Alloy Technology boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Jiangsu Asia-Pacific Light Alloy Technology has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 Jiangsu Asia-Pacific Light Alloy Technology'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. While Jiangsu Asia-Pacific Light Alloy Technology 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. In the last three years, Jiangsu Asia-Pacific Light Alloy Technology created free cash flow amounting to 8.0% 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Asia-Pacific Light Alloy Technology has net cash of CN¥527.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 35% over the last year. So we don't think Jiangsu Asia-Pacific Light Alloy Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Jiangsu Asia-Pacific Light Alloy Technology (1 is concerning!) that you should be aware of before investing here.
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.
