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.' 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, Jingjin Equipment Inc. (SHSE:603279) does carry 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jingjin Equipment Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jingjin Equipment had CN¥200.0m of debt, an increase on none, over one year. But it also has CN¥1.68b in cash to offset that, meaning it has CN¥1.48b net cash.

How Strong Is Jingjin Equipment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jingjin Equipment had liabilities of CN¥4.18b due within 12 months and liabilities of CN¥113.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.68b as well as receivables valued at CN¥1.19b due within 12 months. So it has liabilities totalling CN¥1.42b more than its cash and near-term receivables, combined.

Given Jingjin Equipment has a market capitalization of CN¥11.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jingjin Equipment boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jingjin Equipment grew its EBIT by 32% 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 Jingjin Equipment'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 Jingjin Equipment 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. Looking at the most recent three years, Jingjin Equipment recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Jingjin Equipment does have more liabilities than liquid assets, it also has net cash of CN¥1.48b. And it impressed us with its EBIT growth of 32% over the last year. So is Jingjin Equipment'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. Be aware that Jingjin Equipment is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.