Does Jilin OLED Material Tech (SHSE:688378) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jilin OLED Material Tech Co., Ltd. (SHSE:688378) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. 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 Jilin OLED Material Tech

What Is Jilin OLED Material Tech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Jilin OLED Material Tech had debt of CN¥66.3m, up from CN¥50.8m in one year. But it also has CN¥513.3m in cash to offset that, meaning it has CN¥446.9m net cash.

How Healthy Is Jilin OLED Material Tech's Balance Sheet?

We can see from the most recent balance sheet that Jilin OLED Material Tech had liabilities of CN¥233.2m falling due within a year, and liabilities of CN¥175.6m due beyond that. On the other hand, it had cash of CN¥513.3m and CN¥285.2m worth of receivables due within a year. So it actually has CN¥389.6m more liquid assets than total liabilities.

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

In fact Jilin OLED Material Tech's saving grace is its low debt levels, because its EBIT has tanked 24% 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jilin OLED Material Tech'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 company can only pay off debt with cold hard cash, not accounting profits. While Jilin OLED Material Tech 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, Jilin OLED Material Tech saw substantial negative free cash flow, in total. 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 Jilin OLED Material Tech has net cash of CN¥446.9m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Jilin OLED Material Tech's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Jilin OLED Material Tech you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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