We Think Sichuan Jiuzhou Electronic (SZSE:000801) Can Stay On Top Of Its Debt

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. As with many other companies Sichuan Jiuzhou Electronic Co., Ltd. (SZSE:000801) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sichuan Jiuzhou Electronic

What Is Sichuan Jiuzhou Electronic's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Sichuan Jiuzhou Electronic had debt of CN¥815.1m, up from CN¥539.1m in one year. However, it does have CN¥1.32b in cash offsetting this, leading to net cash of CN¥500.0m.

How Strong Is Sichuan Jiuzhou Electronic's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sichuan Jiuzhou Electronic had liabilities of CN¥3.13b due within 12 months and liabilities of CN¥315.9m due beyond that. Offsetting this, it had CN¥1.32b in cash and CN¥2.99b in receivables that were due within 12 months. So it can boast CN¥862.7m more liquid assets than total liabilities.

This surplus suggests that Sichuan Jiuzhou Electronic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sichuan Jiuzhou Electronic has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Sichuan Jiuzhou Electronic if management cannot prevent a repeat of the 26% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sichuan Jiuzhou Electronic's ability to maintain a healthy balance sheet going forward. 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. Sichuan Jiuzhou Electronic 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. Looking at the most recent three years, Sichuan Jiuzhou Electronic recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sichuan Jiuzhou Electronic has net cash of CN¥500.0m, as well as more liquid assets than liabilities. So we are not troubled with Sichuan Jiuzhou Electronic's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Sichuan Jiuzhou Electronic .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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