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 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. Importantly, Shanghai Jinjiang Shipping (Group) Co., Ltd. (SHSE:601083) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shanghai Jinjiang Shipping (Group)'s Debt?

As you can see below, at the end of September 2024, Shanghai Jinjiang Shipping (Group) had CN¥357.7m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥6.06b in cash to offset that, meaning it has CN¥5.70b net cash.

A Look At Shanghai Jinjiang Shipping (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai Jinjiang Shipping (Group) had liabilities of CN¥1.44b due within 12 months and liabilities of CN¥381.7m due beyond that. Offsetting this, it had CN¥6.06b in cash and CN¥614.0m in receivables that were due within 12 months. So it actually has CN¥4.85b more liquid assets than total liabilities.

This surplus liquidity suggests that Shanghai Jinjiang Shipping (Group)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shanghai Jinjiang Shipping (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Shanghai Jinjiang Shipping (Group)'s load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Shanghai Jinjiang Shipping (Group)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Jinjiang Shipping (Group) 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. Happily for any shareholders, Shanghai Jinjiang Shipping (Group) actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Jinjiang Shipping (Group) has net cash of CN¥5.70b, as well as more liquid assets than liabilities. The cherry on top was that in converted 147% of that EBIT to free cash flow, bringing in CN¥1.3b. So is Shanghai Jinjiang Shipping (Group)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shanghai Jinjiang Shipping (Group) (of which 1 shouldn't be ignored!) you should know about.

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.