Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Jinzai Food Group Co.,Ltd. (SZSE:003000) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Jinzai Food GroupLtd Carry?

As you can see below, at the end of September 2024, Jinzai Food GroupLtd had CN¥250.0m of debt, up from CN¥100.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥491.7m in cash, so it actually has CN¥241.7m net cash.

A Look At Jinzai Food GroupLtd's Liabilities

The latest balance sheet data shows that Jinzai Food GroupLtd had liabilities of CN¥585.8m due within a year, and liabilities of CN¥30.5m falling due after that. Offsetting these obligations, it had cash of CN¥491.7m as well as receivables valued at CN¥19.0m due within 12 months. So its liabilities total CN¥105.6m more than the combination of its cash and short-term receivables.

Having regard to Jinzai Food GroupLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.89b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Jinzai Food GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jinzai Food GroupLtd grew its EBIT by 52% 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 ultimately the future profitability of the business will decide if Jinzai Food GroupLtd can strengthen its balance sheet over time. 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. While Jinzai Food GroupLtd 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. In the last three years, Jinzai Food GroupLtd's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Jinzai Food GroupLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥241.7m. And it impressed us with its EBIT growth of 52% over the last year. So is Jinzai Food GroupLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Jinzai Food GroupLtd .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.