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 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. As with many other companies Shanghai Jahwa United Co., Ltd. (SHSE:600315) makes use of debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Jahwa United's Net Debt?

As you can see below, at the end of September 2024, Shanghai Jahwa United had CN¥651.5m of debt, up from CN¥531.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.26b in cash, so it actually has CN¥2.61b net cash.

How Healthy Is Shanghai Jahwa United's Balance Sheet?

We can see from the most recent balance sheet that Shanghai Jahwa United had liabilities of CN¥2.86b falling due within a year, and liabilities of CN¥645.4m due beyond that. Offsetting this, it had CN¥3.26b in cash and CN¥916.8m in receivables that were due within 12 months. So it can boast CN¥679.1m more liquid assets than total liabilities.

This surplus suggests that Shanghai Jahwa United has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shanghai Jahwa United has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Shanghai Jahwa United's load is not too heavy, because its EBIT was down 44% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shanghai Jahwa United's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shanghai Jahwa United 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. Over the most recent three years, Shanghai Jahwa United recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shanghai Jahwa United has net cash of CN¥2.61b, as well as more liquid assets than liabilities. So we don't have any problem with Shanghai Jahwa United's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Shanghai Jahwa United that 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.