Here's Why Shenzhen Jdd Tech New Material (SZSE:301538) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Shenzhen Jdd Tech New Material Co., Ltd (SZSE:301538) does have debt on its balance sheet. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Jdd Tech New Material

How Much Debt Does Shenzhen Jdd Tech New Material Carry?

As you can see below, at the end of March 2024, Shenzhen Jdd Tech New Material had CN¥37.3m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥628.9m in cash, so it actually has CN¥591.6m net cash.

A Look At Shenzhen Jdd Tech New Material's Liabilities

We can see from the most recent balance sheet that Shenzhen Jdd Tech New Material had liabilities of CN¥165.2m falling due within a year, and liabilities of CN¥22.6m due beyond that. Offsetting these obligations, it had cash of CN¥628.9m as well as receivables valued at CN¥265.6m due within 12 months. So it actually has CN¥706.8m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Jdd Tech New Material has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shenzhen Jdd Tech New Material has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Jdd Tech New Material has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Jdd Tech New Material will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Jdd Tech New Material 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. In the last three years, Shenzhen Jdd Tech New Material created free cash flow amounting to 8.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Jdd Tech New Material has net cash of CN¥591.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. So is Shenzhen Jdd Tech New Material'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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Shenzhen Jdd Tech New Material .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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