The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Hangzhou Jiebai Group Co., Limited (SHSE:600814) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hangzhou Jiebai Group

What Is Hangzhou Jiebai Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Hangzhou Jiebai Group had debt of CN¥174.2m, up from none in one year. But on the other hand it also has CN¥4.94b in cash, leading to a CN¥4.77b net cash position.

A Look At Hangzhou Jiebai Group's Liabilities

We can see from the most recent balance sheet that Hangzhou Jiebai Group had liabilities of CN¥2.45b falling due within a year, and liabilities of CN¥1.70b due beyond that. On the other hand, it had cash of CN¥4.94b and CN¥75.6m worth of receivables due within a year. So it can boast CN¥866.3m more liquid assets than total liabilities.

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

And we also note warmly that Hangzhou Jiebai Group grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hangzhou Jiebai Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hangzhou Jiebai Group 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, Hangzhou Jiebai Group generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hangzhou Jiebai Group has CN¥4.77b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in CN¥152m. So is Hangzhou Jiebai 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hangzhou Jiebai Group has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.