Is Zhejiang Jiecang Linear Motion TechnologyLtd (SHSE:603583) Using Too Much Debt?

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 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. Importantly, Zhejiang Jiecang Linear Motion Technology Co.,Ltd. (SHSE:603583) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Zhejiang Jiecang Linear Motion TechnologyLtd

What Is Zhejiang Jiecang Linear Motion TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Jiecang Linear Motion TechnologyLtd had CN¥1.07b of debt in September 2024, down from CN¥1.51b, one year before. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥1.31b net cash.

A Look At Zhejiang Jiecang Linear Motion TechnologyLtd's Liabilities

According to the last reported balance sheet, Zhejiang Jiecang Linear Motion TechnologyLtd had liabilities of CN¥2.04b due within 12 months, and liabilities of CN¥187.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥717.2m due within 12 months. So it actually has CN¥869.9m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Zhejiang Jiecang Linear Motion TechnologyLtd has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Jiecang Linear Motion TechnologyLtd 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. Zhejiang Jiecang Linear Motion TechnologyLtd 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. Looking at the most recent three years, Zhejiang Jiecang Linear Motion TechnologyLtd recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥1.31b, as well as more liquid assets than liabilities. And we liked the look of last year's 77% year-on-year EBIT growth. So we don't think Zhejiang Jiecang Linear Motion TechnologyLtd's use of debt is risky. 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 instance, we've identified 1 warning sign for Zhejiang Jiecang Linear Motion TechnologyLtd that you should be aware of.

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.