We Think Jonjee Hi-Tech Industrial and Commercial HoldingLtd (SHSE:600872) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Jonjee Hi-Tech Industrial and Commercial Holding Co.,Ltd (SHSE:600872) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

How Much Debt Does Jonjee Hi-Tech Industrial and Commercial HoldingLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Jonjee Hi-Tech Industrial and Commercial HoldingLtd had debt of CN¥265.4m, up from none in one year. However, its balance sheet shows it holds CN¥2.45b in cash, so it actually has CN¥2.18b net cash.

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

According to the last reported balance sheet, Jonjee Hi-Tech Industrial and Commercial HoldingLtd had liabilities of CN¥1.73b due within 12 months, and liabilities of CN¥179.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.45b as well as receivables valued at CN¥41.4m due within 12 months. So it actually has CN¥581.7m 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.

The good news is that Jonjee Hi-Tech Industrial and Commercial HoldingLtd has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jonjee Hi-Tech Industrial and Commercial HoldingLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jonjee Hi-Tech Industrial and Commercial HoldingLtd has CN¥2.18b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥730m, being 92% of its EBIT. So we don't think Jonjee Hi-Tech Industrial and Commercial HoldingLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jonjee Hi-Tech Industrial and Commercial HoldingLtd (of which 2 make us uncomfortable!) you should know about.

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.