Jiangsu Olive Sensors High-Tech (SZSE:300507) Seems To Use Debt Quite Sensibly

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. We can see that Jiangsu Olive Sensors High-Tech Co., Ltd. (SZSE:300507) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Jiangsu Olive Sensors High-Tech

What Is Jiangsu Olive Sensors High-Tech's Net Debt?

As you can see below, Jiangsu Olive Sensors High-Tech had CN¥362.3m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥672.9m in cash offsetting this, leading to net cash of CN¥310.7m.

A Look At Jiangsu Olive Sensors High-Tech's Liabilities

According to the last reported balance sheet, Jiangsu Olive Sensors High-Tech had liabilities of CN¥678.1m due within 12 months, and liabilities of CN¥94.4m due beyond 12 months. On the other hand, it had cash of CN¥672.9m and CN¥590.2m worth of receivables due within a year. So it can boast CN¥490.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangsu Olive Sensors High-Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jiangsu Olive Sensors High-Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Jiangsu Olive Sensors High-Tech grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jiangsu Olive Sensors High-Tech's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu Olive Sensors High-Tech 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 last three years, Jiangsu Olive Sensors High-Tech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangsu Olive Sensors High-Tech has net cash of CN¥310.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So we are not troubled with Jiangsu Olive Sensors High-Tech's debt use. 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, we've discovered 2 warning signs for Jiangsu Olive Sensors High-Tech that you should be aware of before investing here.

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.