Shenzhen Jufei Optoelectronics (SZSE:300303) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Shenzhen Jufei Optoelectronics Co., Ltd. (SZSE:300303) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenzhen Jufei Optoelectronics

What Is Shenzhen Jufei Optoelectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Jufei Optoelectronics had CN¥467.9m of debt in September 2024, down from CN¥668.9m, one year before. But on the other hand it also has CN¥1.91b in cash, leading to a CN¥1.45b net cash position.

A Look At Shenzhen Jufei Optoelectronics' Liabilities

We can see from the most recent balance sheet that Shenzhen Jufei Optoelectronics had liabilities of CN¥1.91b falling due within a year, and liabilities of CN¥492.6m due beyond that. On the other hand, it had cash of CN¥1.91b and CN¥1.58b worth of receivables due within a year. So it actually has CN¥1.09b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Jufei Optoelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Shenzhen Jufei Optoelectronics has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Shenzhen Jufei Optoelectronics saw its EBIT decline by 7.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shenzhen Jufei Optoelectronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhen Jufei Optoelectronics 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 three years, Shenzhen Jufei Optoelectronics recorded free cash flow worth 51% 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 Shenzhen Jufei Optoelectronics has CN¥1.45b in net cash and a decent-looking balance sheet. So we are not troubled with Shenzhen Jufei Optoelectronics's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shenzhen Jufei Optoelectronics has 5 warning signs (and 1 which can't be ignored) we think you should know about.

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.