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. We note that Changjiang & Jinggong Steel Building (Group) Co., Ltd (SHSE:600496) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is Changjiang & Jinggong Steel Building (Group)'s Net Debt?

The chart below, which you can click on for greater detail, shows that Changjiang & Jinggong Steel Building (Group) had CN¥3.80b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds CN¥4.87b in cash, so it actually has CN¥1.08b net cash.

How Healthy Is Changjiang & Jinggong Steel Building (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Changjiang & Jinggong Steel Building (Group) had liabilities of CN¥12.5b falling due within a year, and liabilities of CN¥2.46b due beyond that. On the other hand, it had cash of CN¥4.87b and CN¥11.9b worth of receivables due within a year. So it can boast CN¥1.82b more liquid assets than total liabilities.

This excess liquidity is a great indication that Changjiang & Jinggong Steel Building (Group)'s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Changjiang & Jinggong Steel Building (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Changjiang & Jinggong Steel Building (Group)'s saving grace is its low debt levels, because its EBIT has tanked 40% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Changjiang & Jinggong Steel Building (Group)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Changjiang & Jinggong Steel Building (Group) 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. Over the last three years, Changjiang & Jinggong Steel Building (Group) recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changjiang & Jinggong Steel Building (Group) has net cash of CN¥1.08b, as well as more liquid assets than liabilities. So we are not troubled with Changjiang & Jinggong Steel Building (Group)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Changjiang & Jinggong Steel Building (Group) has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.