We Think Shenzhen Jufei Optoelectronics (SZSE:300303) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Shenzhen Jufei Optoelectronics Co., Ltd. (SZSE:300303) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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.

View our latest analysis for Shenzhen Jufei Optoelectronics

How Much Debt Does Shenzhen Jufei Optoelectronics Carry?

As you can see below, at the end of March 2024, Shenzhen Jufei Optoelectronics had CN¥681.2m of debt, up from CN¥480.8m a year ago. Click the image for more detail. But it also has CN¥1.90b in cash to offset that, meaning it has CN¥1.22b net cash.

How Strong Is Shenzhen Jufei Optoelectronics' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Jufei Optoelectronics had liabilities of CN¥1.86b falling due within a year, and liabilities of CN¥490.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.90b as well as receivables valued at CN¥1.58b due within 12 months. So it can boast CN¥1.13b more liquid assets than total liabilities.

It's good to see that Shenzhen Jufei Optoelectronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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.

On top of that, Shenzhen Jufei Optoelectronics grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Jufei Optoelectronics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Shenzhen Jufei Optoelectronics produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Jufei Optoelectronics has net cash of CN¥1.22b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 33% over the last year. So is Shenzhen Jufei Optoelectronics's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Shenzhen Jufei Optoelectronics you should be aware of, and 1 of them is a bit concerning.

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.