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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jiangsu Boqian New Materials Stock Co., Ltd. (SHSE:605376) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jiangsu Boqian New Materials Stock's Debt?

As you can see below, Jiangsu Boqian New Materials Stock had CN¥110.1m of debt at June 2024, down from CN¥260.1m a year prior. However, it does have CN¥198.3m in cash offsetting this, leading to net cash of CN¥88.3m.

How Strong Is Jiangsu Boqian New Materials Stock's Balance Sheet?

The latest balance sheet data shows that Jiangsu Boqian New Materials Stock had liabilities of CN¥265.6m due within a year, and liabilities of CN¥66.5m falling due after that. Offsetting these obligations, it had cash of CN¥198.3m as well as receivables valued at CN¥221.2m due within 12 months. So it can boast CN¥87.4m more liquid assets than total liabilities.

This state of affairs indicates that Jiangsu Boqian New Materials Stock's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.38b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Jiangsu Boqian New Materials Stock has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that Jiangsu Boqian New Materials Stock's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Boqian New Materials Stock'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. Jiangsu Boqian New Materials Stock 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. During the last three years, Jiangsu Boqian New Materials Stock burned a lot of cash. 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 we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Boqian New Materials Stock has net cash of CN¥88.3m, as well as more liquid assets than liabilities. Despite its cash we think that Jiangsu Boqian New Materials Stock seems to struggle to grow its EBIT, so we are wary of the stock. 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. We've identified 4 warning signs with Jiangsu Boqian New Materials Stock (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.