We Think Jiangsu Lettall ElectronicLtd (SHSE:603629) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jiangsu Lettall Electronic Co.,Ltd (SHSE:603629) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 Jiangsu Lettall ElectronicLtd

What Is Jiangsu Lettall ElectronicLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangsu Lettall ElectronicLtd had CN¥917.8m of debt, an increase on CN¥417.0m, over one year. But it also has CN¥1.43b in cash to offset that, meaning it has CN¥514.5m net cash.

How Strong Is Jiangsu Lettall ElectronicLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jiangsu Lettall ElectronicLtd had liabilities of CN¥2.58b due within 12 months and liabilities of CN¥457.2m due beyond that. Offsetting this, it had CN¥1.43b in cash and CN¥658.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥946.8m.

Since publicly traded Jiangsu Lettall ElectronicLtd shares are worth a total of CN¥5.93b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jiangsu Lettall ElectronicLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jiangsu Lettall ElectronicLtd grew its EBIT by 78% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangsu Lettall ElectronicLtd will need earnings to service that debt. 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. Jiangsu Lettall ElectronicLtd 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. Happily for any shareholders, Jiangsu Lettall ElectronicLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jiangsu Lettall ElectronicLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥514.5m. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in CN¥445m. So is Jiangsu Lettall ElectronicLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangsu Lettall ElectronicLtd is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.