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. Importantly, Nanjing Xinjiekou Department Store Co., Ltd. (SHSE:600682) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Nanjing Xinjiekou Department Store's Net Debt?

As you can see below, Nanjing Xinjiekou Department Store had CN¥786.1m of debt at September 2024, down from CN¥895.1m a year prior. But on the other hand it also has CN¥5.77b in cash, leading to a CN¥4.98b net cash position.

A Look At Nanjing Xinjiekou Department Store's Liabilities

Zooming in on the latest balance sheet data, we can see that Nanjing Xinjiekou Department Store had liabilities of CN¥5.93b due within 12 months and liabilities of CN¥983.4m due beyond that. Offsetting these obligations, it had cash of CN¥5.77b as well as receivables valued at CN¥1.57b due within 12 months. So it can boast CN¥428.6m more liquid assets than total liabilities.

This surplus suggests that Nanjing Xinjiekou Department Store has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nanjing Xinjiekou Department Store boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Nanjing Xinjiekou Department Store's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nanjing Xinjiekou Department Store can strengthen its balance sheet over time. 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. Nanjing Xinjiekou Department Store 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, Nanjing Xinjiekou Department Store actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nanjing Xinjiekou Department Store has CN¥4.98b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥512m, being 103% of its EBIT. So is Nanjing Xinjiekou Department Store'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Nanjing Xinjiekou Department Store you should be aware of.

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.