We Think JC Finance & Tax Interconnect Holdings (SZSE:002530) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JC Finance & Tax Interconnect Holdings Ltd. (SZSE:002530) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JC Finance & Tax Interconnect Holdings

What Is JC Finance & Tax Interconnect Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 JC Finance & Tax Interconnect Holdings had CN¥297.4m of debt, an increase on CN¥285.6m, over one year. However, its balance sheet shows it holds CN¥380.2m in cash, so it actually has CN¥82.8m net cash.

A Look At JC Finance & Tax Interconnect Holdings' Liabilities

The latest balance sheet data shows that JC Finance & Tax Interconnect Holdings had liabilities of CN¥968.9m due within a year, and liabilities of CN¥118.9m falling due after that. Offsetting this, it had CN¥380.2m in cash and CN¥422.1m in receivables that were due within 12 months. So its liabilities total CN¥285.6m more than the combination of its cash and short-term receivables.

Since publicly traded JC Finance & Tax Interconnect Holdings shares are worth a total of CN¥7.57b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, JC Finance & Tax Interconnect Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, JC Finance & Tax Interconnect Holdings turned things around in the last 12 months, delivering and EBIT of CN¥14m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JC Finance & Tax Interconnect Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. JC Finance & Tax Interconnect Holdings 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. Over the last year, JC Finance & Tax Interconnect Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about JC Finance & Tax Interconnect Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥82.8m. So we are not troubled with JC Finance & Tax Interconnect Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for JC Finance & Tax Interconnect Holdings you should be aware of.

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.