Jason Furniture (Hangzhou)Ltd (SHSE:603816) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jason Furniture (Hangzhou) Co.,Ltd. (SHSE:603816) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jason Furniture (Hangzhou)Ltd

What Is Jason Furniture (Hangzhou)Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that Jason Furniture (Hangzhou)Ltd had debt of CN¥1.27b at the end of March 2024, a reduction from CN¥2.13b over a year. However, its balance sheet shows it holds CN¥2.58b in cash, so it actually has CN¥1.31b net cash.

How Strong Is Jason Furniture (Hangzhou)Ltd's Balance Sheet?

We can see from the most recent balance sheet that Jason Furniture (Hangzhou)Ltd had liabilities of CN¥5.25b falling due within a year, and liabilities of CN¥497.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.58b as well as receivables valued at CN¥1.61b due within 12 months. So it has liabilities totalling CN¥1.56b more than its cash and near-term receivables, combined.

Of course, Jason Furniture (Hangzhou)Ltd has a market capitalization of CN¥27.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jason Furniture (Hangzhou)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Jason Furniture (Hangzhou)Ltd grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jason Furniture (Hangzhou)Ltd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jason Furniture (Hangzhou)Ltd 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, Jason Furniture (Hangzhou)Ltd reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jason Furniture (Hangzhou)Ltd has CN¥1.31b in net cash. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't have any problem with Jason Furniture (Hangzhou)Ltd's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Jason Furniture (Hangzhou)Ltd (including 1 which is a bit concerning) .

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.

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