Here's Why Beijing Jetsen Technology (SZSE:300182) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Beijing Jetsen Technology Co., Ltd (SZSE:300182) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Beijing Jetsen Technology

What Is Beijing Jetsen Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Beijing Jetsen Technology had CN¥712.8m of debt in September 2024, down from CN¥784.8m, one year before. However, because it has a cash reserve of CN¥110.5m, its net debt is less, at about CN¥602.2m.

A Look At Beijing Jetsen Technology's Liabilities

According to the last reported balance sheet, Beijing Jetsen Technology had liabilities of CN¥3.05b due within 12 months, and liabilities of CN¥6.01m due beyond 12 months. Offsetting this, it had CN¥110.5m in cash and CN¥2.26b in receivables that were due within 12 months. So it has liabilities totalling CN¥686.7m more than its cash and near-term receivables, combined.

Since publicly traded Beijing Jetsen Technology shares are worth a total of CN¥18.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With debt at a measly -0.41 times EBITDA and EBIT covering interest a whopping 15.5 times, it's clear that Beijing Jetsen Technology is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. But the bad news is that Beijing Jetsen Technology has seen its EBIT plunge 19% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Beijing Jetsen Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Beijing Jetsen Technology recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Beijing Jetsen Technology's net debt to EBITDA was a real positive on this analysis, as was its interest cover. In contrast, our confidence was undermined by its apparent struggle to grow its EBIT. Considering this range of data points, we think Beijing Jetsen Technology is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Beijing Jetsen Technology 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.