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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jiangsu Shemar Electric Co.,Ltd (SHSE:603530) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangsu Shemar ElectricLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jiangsu Shemar ElectricLtd had CN¥30.4m of debt, an increase on none, over one year. However, it does have CN¥380.8m in cash offsetting this, leading to net cash of CN¥350.4m.

How Healthy Is Jiangsu Shemar ElectricLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Shemar ElectricLtd had liabilities of CN¥541.3m falling due within a year, and liabilities of CN¥53.8m due beyond that. Offsetting these obligations, it had cash of CN¥380.8m as well as receivables valued at CN¥622.4m due within 12 months. So it actually has CN¥408.1m more liquid assets than total liabilities.

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

Even more impressive was the fact that Jiangsu Shemar ElectricLtd grew its EBIT by 222% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Shemar ElectricLtd 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. Jiangsu Shemar ElectricLtd 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. Considering the last three years, Jiangsu Shemar ElectricLtd actually recorded a cash outflow, overall. 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 it is always sensible to investigate a company's debt, in this case Jiangsu Shemar ElectricLtd has CN¥350.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 222% year-on-year EBIT growth. So we are not troubled with Jiangsu Shemar ElectricLtd's debt use. 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. Case in point: We've spotted 1 warning sign for Jiangsu Shemar ElectricLtd you should be aware of.

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.