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

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. We can see that Juewei Food Co., Ltd. (SHSE:603517) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Juewei Food

What Is Juewei Food's Net Debt?

As you can see below, Juewei Food had CN¥580.2m of debt at September 2024, down from CN¥619.2m a year prior. However, its balance sheet shows it holds CN¥991.8m in cash, so it actually has CN¥411.6m net cash.

How Strong Is Juewei Food's Balance Sheet?

The latest balance sheet data shows that Juewei Food had liabilities of CN¥1.86b due within a year, and liabilities of CN¥354.3m falling due after that. Offsetting these obligations, it had cash of CN¥991.8m as well as receivables valued at CN¥276.7m due within 12 months. So it has liabilities totalling CN¥941.9m more than its cash and near-term receivables, combined.

Since publicly traded Juewei Food shares are worth a total of CN¥11.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Juewei Food boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Juewei Food has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 Juewei Food'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Juewei Food 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, Juewei Food's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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¥411.6m. And it impressed us with its EBIT growth of 41% over the last year. So we don't think Juewei Food's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Juewei Food that you should be aware of before investing here.

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.

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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.