We Think Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd (SHSE:600363) Can Stay On Top Of Its Debt

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.' 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. Importantly, Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd. (SHSE:600363) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd

How Much Debt Does Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd Carry?

As you can see below, at the end of September 2024, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had CN¥1.55b of debt, up from CN¥1.38b a year ago. Click the image for more detail. But on the other hand it also has CN¥1.69b in cash, leading to a CN¥142.8m net cash position.

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

The latest balance sheet data shows that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd had liabilities of CN¥2.93b due within a year, and liabilities of CN¥410.9m falling due after that. Offsetting this, it had CN¥1.69b in cash and CN¥1.68b in receivables that were due within 12 months. 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 while it's hard to imagine that the CN¥20.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd if management cannot prevent a repeat of the 68% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. 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 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¥142.8m, as well as more liquid assets than liabilities. So we are not troubled with Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's debt use. 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. For instance, we've identified 1 warning sign for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.