Jack TechnologyLtd (SHSE:603337) Seems To Use Debt Rather Sparingly

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, Jack Technology Co.,Ltd (SHSE:603337) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jack TechnologyLtd

How Much Debt Does Jack TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Jack TechnologyLtd had CN¥1.38b of debt in June 2024, down from CN¥1.52b, one year before. However, its balance sheet shows it holds CN¥1.88b in cash, so it actually has CN¥505.9m net cash.

How Strong Is Jack TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Jack TechnologyLtd had liabilities of CN¥4.00b due within a year, and liabilities of CN¥220.6m falling due after that. Offsetting this, it had CN¥1.88b in cash and CN¥1.48b in receivables that were due within 12 months. So it has liabilities totalling CN¥852.8m more than its cash and near-term receivables, combined.

Of course, Jack TechnologyLtd has a market capitalization of CN¥13.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jack TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Jack TechnologyLtd has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Jack TechnologyLtd generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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¥505.9m. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in CN¥1.2b. So we don't think Jack TechnologyLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Jack TechnologyLtd that you should be aware of.

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.