Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd (SHSE:600363) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd. (SHSE:600363) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

What Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had debt of CN¥1.55b, up from CN¥1.38b in one year. However, it does have CN¥1.69b in cash offsetting this, leading to net cash of CN¥142.8m.

How Healthy Is Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's Balance Sheet?

We can see from the most recent balance sheet that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had liabilities of CN¥2.93b falling due within a year, and liabilities of CN¥410.9m due beyond that. On the other hand, it had cash of CN¥1.69b and CN¥1.68b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥27.4b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's load is not too heavy, because its EBIT was down 68% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent two years, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has CN¥142.8m in net cash and a decent-looking balance sheet. So we don't have any problem with Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's earnings per share history for free.

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.