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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jiayou International Logistics Co.,Ltd (SHSE:603871) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Jiayou International LogisticsLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jiayou International LogisticsLtd had debt of CN¥138.1m, up from CN¥30.0m in one year. But on the other hand it also has CN¥1.44b in cash, leading to a CN¥1.31b net cash position.

How Strong Is Jiayou International LogisticsLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiayou International LogisticsLtd had liabilities of CN¥2.41b falling due within a year, and liabilities of CN¥65.4m due beyond that. On the other hand, it had cash of CN¥1.44b and CN¥860.5m worth of receivables due within a year. So its liabilities total CN¥170.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Jiayou International LogisticsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥18.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Jiayou International LogisticsLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jiayou International LogisticsLtd grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiayou International LogisticsLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiayou International LogisticsLtd 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. During the last three years, Jiayou International LogisticsLtd produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Jiayou International LogisticsLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.31b. And it impressed us with its EBIT growth of 46% over the last year. So is Jiayou International LogisticsLtd's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Jiayou International LogisticsLtd (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.