Jason Furniture (Hangzhou)Ltd (SHSE:603816) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jason Furniture (Hangzhou) Co.,Ltd. (SHSE:603816) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jason Furniture (Hangzhou)Ltd

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

As you can see below, Jason Furniture (Hangzhou)Ltd had CN¥1.10b of debt at September 2024, down from CN¥3.25b a year prior. However, its balance sheet shows it holds CN¥2.27b in cash, so it actually has CN¥1.17b net cash.

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

According to the last reported balance sheet, Jason Furniture (Hangzhou)Ltd had liabilities of CN¥5.67b due within 12 months, and liabilities of CN¥455.5m due beyond 12 months. Offsetting this, it had CN¥2.27b in cash and CN¥1.56b in receivables that were due within 12 months. So its liabilities total CN¥2.29b more than the combination of its cash and short-term receivables.

Given Jason Furniture (Hangzhou)Ltd has a market capitalization of CN¥23.4b, it's hard to believe these liabilities pose much 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!

While Jason Furniture (Hangzhou)Ltd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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. 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 weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Jason Furniture (Hangzhou)Ltd's liabilities, but we can be reassured by the fact it has 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Jason Furniture (Hangzhou)Ltd , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.