These 4 Measures Indicate That Jiangsu Olive Sensors High-Tech (SZSE:300507) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jiangsu Olive Sensors High-Tech Co., Ltd. (SZSE:300507) does carry debt. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jiangsu Olive Sensors High-Tech

How Much Debt Does Jiangsu Olive Sensors High-Tech Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Olive Sensors High-Tech had CN¥513.0m of debt, an increase on CN¥339.0m, over one year. However, it does have CN¥746.4m in cash offsetting this, leading to net cash of CN¥233.3m.

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

We can see from the most recent balance sheet that Jiangsu Olive Sensors High-Tech had liabilities of CN¥693.4m falling due within a year, and liabilities of CN¥185.6m due beyond that. On the other hand, it had cash of CN¥746.4m and CN¥598.4m worth of receivables due within a year. So it can boast CN¥465.7m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Olive Sensors High-Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Olive Sensors High-Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Jiangsu Olive Sensors High-Tech grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangsu Olive Sensors High-Tech 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, a company can only pay off debt with cold hard cash, not accounting profits. 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¥233.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So we are not troubled with Jiangsu Olive Sensors High-Tech's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Jiangsu Olive Sensors High-Tech has 4 warning signs (and 1 which is concerning) we think you should know about.

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.

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