Does Jafron BiomedicalLtd (SZSE:300529) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jafron Biomedical Co.,Ltd. (SZSE:300529) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jafron BiomedicalLtd

What Is Jafron BiomedicalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Jafron BiomedicalLtd had CN¥1.62b of debt in September 2024, down from CN¥1.72b, one year before. However, it does have CN¥2.71b in cash offsetting this, leading to net cash of CN¥1.10b.

How Healthy Is Jafron BiomedicalLtd's Balance Sheet?

We can see from the most recent balance sheet that Jafron BiomedicalLtd had liabilities of CN¥872.9m falling due within a year, and liabilities of CN¥1.43b due beyond that. Offsetting these obligations, it had cash of CN¥2.71b as well as receivables valued at CN¥217.8m due within 12 months. So it can boast CN¥631.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Jafron BiomedicalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jafron BiomedicalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Jafron BiomedicalLtd grew its EBIT by 125% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Jafron BiomedicalLtd 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. Jafron BiomedicalLtd 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. Over the last three years, Jafron BiomedicalLtd recorded free cash flow worth a fulsome 84% 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

While it is always sensible to investigate a company's debt, in this case Jafron BiomedicalLtd has CN¥1.10b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥873m, being 84% of its EBIT. So we don't think Jafron BiomedicalLtd'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. Case in point: We've spotted 1 warning sign for Jafron BiomedicalLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.