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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Jason Furniture (Hangzhou) Co.,Ltd. (SHSE:603816) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jason Furniture (Hangzhou)Ltd

How Much Debt Does Jason Furniture (Hangzhou)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that Jason Furniture (Hangzhou)Ltd had CN¥1.10b of debt in September 2024, down from CN¥3.25b, one year before. But it also has CN¥2.27b in cash to offset that, meaning it has CN¥1.17b 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¥5.67b falling due within a year, and liabilities of CN¥455.5m due beyond that. Offsetting these obligations, it had cash of CN¥2.27b as well as receivables valued at CN¥1.56b due within 12 months. So it has liabilities totalling CN¥2.29b more than its cash and near-term receivables, combined.

Since publicly traded Jason Furniture (Hangzhou)Ltd shares are worth a total of CN¥22.4b, it seems unlikely that this level of liabilities would be a major threat. 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!

Jason Furniture (Hangzhou)Ltd's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. In the last three years, Jason Furniture (Hangzhou)Ltd's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Jason Furniture (Hangzhou)Ltd does have more liabilities than liquid assets, it also has net cash of CN¥1.17b. 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. For example, we've discovered 1 warning sign for Jason Furniture (Hangzhou)Ltd that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.