Jafron BiomedicalLtd (SZSE:300529) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jafron Biomedical Co.,Ltd. (SZSE:300529) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Jafron BiomedicalLtd

What Is Jafron BiomedicalLtd's Net Debt?

As you can see below, Jafron BiomedicalLtd had CN¥1.62b of debt at September 2024, down from CN¥1.72b a year prior. 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?

Zooming in on the latest balance sheet data, we can see that Jafron BiomedicalLtd had liabilities of CN¥872.9m due within 12 months 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 surplus suggests that Jafron BiomedicalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jafron BiomedicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jafron BiomedicalLtd grew its EBIT by 125% over twelve months. That boost will make it even easier to pay down debt going forward. 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.

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. During the last three years, Jafron BiomedicalLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jafron BiomedicalLtd has net cash of CN¥1.10b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥873m, being 84% of its EBIT. So is Jafron BiomedicalLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Jafron BiomedicalLtd that 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.