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.' 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. As with many other companies Jafron Biomedical Co.,Ltd. (SZSE:300529) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jafron BiomedicalLtd

How Much Debt Does Jafron BiomedicalLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jafron BiomedicalLtd had debt of CN¥1.72b, up from CN¥1.10b in one year. However, it does have CN¥2.70b in cash offsetting this, leading to net cash of CN¥981.0m.

How Healthy Is Jafron BiomedicalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jafron BiomedicalLtd had liabilities of CN¥819.5m due within 12 months and liabilities of CN¥1.55b due beyond that. Offsetting this, it had CN¥2.70b in cash and CN¥168.9m in receivables that were due within 12 months. So it can boast CN¥499.0m 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.

It is just as well that Jafron BiomedicalLtd's load is not too heavy, because its EBIT was down 71% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jafron BiomedicalLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Jafron BiomedicalLtd produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jafron BiomedicalLtd has CN¥981.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Jafron BiomedicalLtd's use of debt. 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 - Jafron BiomedicalLtd has 3 warning signs we think 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.