Does Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) Have A 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jonjee Hi-Tech Industrial and Commercial Holding Co.,Ltd (SHSE:600872) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

View our latest analysis for Jonjee Hi-Tech Industrial and Commercial HoldingLtd

What Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jonjee Hi-Tech Industrial and Commercial HoldingLtd had CN¥473.1m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥744.4m in cash, so it actually has CN¥271.3m net cash.

How Strong Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd's Balance Sheet?

We can see from the most recent balance sheet that Jonjee Hi-Tech Industrial and Commercial HoldingLtd had liabilities of CN¥1.81b falling due within a year, and liabilities of CN¥213.8m due beyond that. Offsetting these obligations, it had cash of CN¥744.4m as well as receivables valued at CN¥73.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.

Of course, Jonjee Hi-Tech Industrial and Commercial HoldingLtd has a market capitalization of CN¥16.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jonjee Hi-Tech Industrial and Commercial HoldingLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Jonjee Hi-Tech Industrial and Commercial HoldingLtd grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 Jonjee Hi-Tech Industrial and Commercial HoldingLtd'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jonjee Hi-Tech Industrial and Commercial HoldingLtd 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, Jonjee Hi-Tech Industrial and Commercial HoldingLtd recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Jonjee Hi-Tech Industrial and Commercial HoldingLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥271.3m. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in CN¥639m. So we don't think Jonjee Hi-Tech Industrial and Commercial HoldingLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Jonjee Hi-Tech Industrial and Commercial HoldingLtd (at least 2 which can't be ignored) , 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.