Is Juewei Food (SHSE:603517) Using Too Much Debt?

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. Importantly, Juewei Food Co., Ltd. (SHSE:603517) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. 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.

See our latest analysis for Juewei Food

How Much Debt Does Juewei Food Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Juewei Food had debt of CN¥863.5m, up from CN¥415.2m in one year. However, its balance sheet shows it holds CN¥1.51b in cash, so it actually has CN¥644.7m net cash.

How Healthy Is Juewei Food's Balance Sheet?

We can see from the most recent balance sheet that Juewei Food had liabilities of CN¥2.17b falling due within a year, and liabilities of CN¥373.0m due beyond that. On the other hand, it had cash of CN¥1.51b and CN¥294.4m worth of receivables due within a year. So it has liabilities totalling CN¥744.4m more than its cash and near-term receivables, combined.

Given Juewei Food has a market capitalization of CN¥13.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Juewei Food also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Juewei Food grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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 Juewei Food can strengthen its balance sheet over time. 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. Juewei Food 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, Juewei Food recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Juewei Food's liabilities, but we can be reassured by the fact it has has net cash of CN¥644.7m. And it impressed us with its EBIT growth of 54% over the last year. So we don't think Juewei Food's use of debt is risky. 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. For example - Juewei Food has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.