Is Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Jonjee Hi-Tech Industrial and Commercial Holding Co.,Ltd (SHSE:600872) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 December 2023 Jonjee Hi-Tech Industrial and Commercial HoldingLtd had CN¥100.0m of debt, an increase on none, over one year. However, it does have CN¥1.99b in cash offsetting this, leading to net cash of CN¥1.89b.

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

Zooming in on the latest balance sheet data, we can see that Jonjee Hi-Tech Industrial and Commercial HoldingLtd had liabilities of CN¥1.34b due within 12 months and liabilities of CN¥181.2m due beyond that. Offsetting this, it had CN¥1.99b in cash and CN¥91.8m in receivables that were due within 12 months. So it can boast CN¥563.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Jonjee Hi-Tech Industrial and Commercial HoldingLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

While Jonjee Hi-Tech Industrial and Commercial HoldingLtd doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Jonjee Hi-Tech Industrial and Commercial HoldingLtd generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has net cash of CN¥1.89b, as well as more liquid assets than liabilities. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥570m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Jonjee Hi-Tech Industrial and Commercial HoldingLtd (2 are concerning) you should be aware of.

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.