Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd (SHSE:600363) Has A Rock Solid Balance Sheet

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. As with many other companies Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd. (SHSE:600363) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

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

The image below, which you can click on for greater detail, shows that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had debt of CN¥1.38b at the end of March 2024, a reduction from CN¥1.48b over a year. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥251.1m.

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

Zooming in on the latest balance sheet data, we can see that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had liabilities of CN¥2.57b due within 12 months and liabilities of CN¥387.1m due beyond that. On the other hand, it had cash of CN¥1.63b and CN¥1.37b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥12.8b 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 was also good to see that despite losing money on the EBIT line last year, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd turned things around in the last 12 months, delivering and EBIT of CN¥70m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd can strengthen its balance sheet over time. 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. Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd 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. Happily for any shareholders, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd has net cash of CN¥251.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 243% of that EBIT to free cash flow, bringing in CN¥171m. So we don't think Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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