Is Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Zhejiang Jiecang Linear Motion Technology Co.,Ltd. (SHSE:603583) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 Zhejiang Jiecang Linear Motion TechnologyLtd

What Is Zhejiang Jiecang Linear Motion TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that Zhejiang Jiecang Linear Motion TechnologyLtd had debt of CN¥1.15b at the end of March 2024, a reduction from CN¥1.79b over a year. But on the other hand it also has CN¥1.77b in cash, leading to a CN¥617.3m net cash position.

How Healthy Is Zhejiang Jiecang Linear Motion TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Jiecang Linear Motion TechnologyLtd had liabilities of CN¥1.82b falling due within a year, and liabilities of CN¥315.0m due beyond that. Offsetting this, it had CN¥1.77b in cash and CN¥511.8m in receivables that were due within 12 months. So it can boast CN¥140.2m more liquid assets than total liabilities.

This state of affairs indicates that Zhejiang Jiecang Linear Motion 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¥7.03b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Zhejiang Jiecang Linear Motion TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Zhejiang Jiecang Linear Motion TechnologyLtd grew its EBIT by 113% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Jiecang Linear Motion TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Jiecang Linear Motion TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Zhejiang Jiecang Linear Motion TechnologyLtd recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Jiecang Linear Motion TechnologyLtd has net cash of CN¥617.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 113% year-on-year EBIT growth. So we are not troubled with Zhejiang Jiecang Linear Motion TechnologyLtd'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 instance, we've identified 1 warning sign for Zhejiang Jiecang Linear Motion TechnologyLtd that 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.