These 4 Measures Indicate That Changsha Jingjia Microelectronics (SZSE:300474) Is Using Debt Extensively

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Changsha Jingjia Microelectronics Co., Ltd. (SZSE:300474) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Changsha Jingjia Microelectronics

What Is Changsha Jingjia Microelectronics's Debt?

As you can see below, Changsha Jingjia Microelectronics had CN¥202.8m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥969.7m in cash, leading to a CN¥766.9m net cash position.

A Look At Changsha Jingjia Microelectronics' Liabilities

We can see from the most recent balance sheet that Changsha Jingjia Microelectronics had liabilities of CN¥637.9m falling due within a year, and liabilities of CN¥154.6m due beyond that. Offsetting this, it had CN¥969.7m in cash and CN¥1.09b in receivables that were due within 12 months. So it can boast CN¥1.26b more liquid assets than total liabilities.

This short term liquidity is a sign that Changsha Jingjia Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Changsha Jingjia Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Changsha Jingjia Microelectronics's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changsha Jingjia Microelectronics 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. Changsha Jingjia Microelectronics 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, Changsha Jingjia Microelectronics burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changsha Jingjia Microelectronics has net cash of CN¥766.9m, as well as more liquid assets than liabilities. So while Changsha Jingjia Microelectronics does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Changsha Jingjia Microelectronics has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.