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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Sichuan Jiuzhou Electronic Co., Ltd. (SZSE:000801) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sichuan Jiuzhou Electronic

What Is Sichuan Jiuzhou Electronic's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sichuan Jiuzhou Electronic had CN¥745.5m of debt, an increase on CN¥531.2m, over one year. But on the other hand it also has CN¥1.06b in cash, leading to a CN¥315.7m net cash position.

How Healthy Is Sichuan Jiuzhou Electronic's Balance Sheet?

We can see from the most recent balance sheet that Sichuan Jiuzhou Electronic had liabilities of CN¥3.18b falling due within a year, and liabilities of CN¥316.7m due beyond that. Offsetting this, it had CN¥1.06b in cash and CN¥2.92b in receivables that were due within 12 months. So it can boast CN¥490.9m 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 58% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sichuan Jiuzhou Electronic's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sichuan Jiuzhou Electronic 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, Sichuan Jiuzhou Electronic created free cash flow amounting to 6.2% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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¥315.7m, as well as more liquid assets than liabilities. So we don't have any problem with Sichuan Jiuzhou Electronic's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Sichuan Jiuzhou Electronic (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.