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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does Shenzhen Jufei Optoelectronics Carry?

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¥675.1m, one year before. However, it does have CN¥1.91b in cash offsetting this, leading to net cash of CN¥1.45b.

How Strong Is Shenzhen Jufei Optoelectronics' Balance Sheet?

According to the last reported balance sheet, Shenzhen Jufei Optoelectronics had liabilities of CN¥1.91b due within 12 months, and liabilities of CN¥492.6m due beyond 12 months. On the other hand, it had cash of CN¥1.91b and CN¥1.58b worth of receivables due within a year. So it can boast CN¥1.09b more liquid assets than total liabilities.

This surplus suggests that Shenzhen Jufei Optoelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

See our latest analysis for Shenzhen Jufei Optoelectronics

In addition to that, we're happy to report that Shenzhen Jufei Optoelectronics has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Jufei Optoelectronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 65% 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 Shenzhen Jufei Optoelectronics has net cash of CN¥1.45b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 79% over the last year. So we don't think Shenzhen Jufei Optoelectronics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Shenzhen Jufei Optoelectronics (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.