Is Jack TechnologyLtd (SHSE:603337) A Risky Investment?

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 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. We can see that Jack Technology Co.,Ltd (SHSE:603337) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jack TechnologyLtd

What Is Jack TechnologyLtd's Net Debt?

As you can see below, Jack TechnologyLtd had CN¥1.37b of debt at September 2023, down from CN¥2.55b a year prior. However, it does have CN¥1.45b in cash offsetting this, leading to net cash of CN¥76.4m.

A Look At Jack TechnologyLtd's Liabilities

According to the last reported balance sheet, Jack TechnologyLtd had liabilities of CN¥3.74b due within 12 months, and liabilities of CN¥148.2m due beyond 12 months. Offsetting this, it had CN¥1.45b in cash and CN¥1.42b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.02b more than its cash and near-term receivables, combined.

Given Jack TechnologyLtd has a market capitalization of CN¥10.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Jack TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Jack TechnologyLtd has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jack TechnologyLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jack TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Jack TechnologyLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Jack TechnologyLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥76.4m. So while Jack TechnologyLtd does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jack TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.