AVIC Jonhon Optronic TechnologyLtd (SZSE:002179) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 AVIC Jonhon Optronic Technology Co.,Ltd. (SZSE:002179) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AVIC Jonhon Optronic TechnologyLtd

What Is AVIC Jonhon Optronic TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that AVIC Jonhon Optronic TechnologyLtd had CN¥904.9m of debt in June 2024, down from CN¥1.21b, one year before. However, it does have CN¥8.84b in cash offsetting this, leading to net cash of CN¥7.94b.

How Strong Is AVIC Jonhon Optronic TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that AVIC Jonhon Optronic TechnologyLtd had liabilities of CN¥12.1b falling due within a year, and liabilities of CN¥905.0m due beyond that. Offsetting these obligations, it had cash of CN¥8.84b as well as receivables valued at CN¥13.7b due within 12 months. So it actually has CN¥9.57b more liquid assets than total liabilities.

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

But the other side of the story is that AVIC Jonhon Optronic TechnologyLtd saw its EBIT decline by 2.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AVIC Jonhon Optronic 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AVIC Jonhon Optronic 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. In the last three years, AVIC Jonhon Optronic TechnologyLtd's free cash flow amounted to 33% of its EBIT, less 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 AVIC Jonhon Optronic TechnologyLtd has net cash of CN¥7.94b, as well as more liquid assets than liabilities. So we are not troubled with AVIC Jonhon Optronic TechnologyLtd's debt use. 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. For example, we've discovered 1 warning sign for AVIC Jonhon Optronic TechnologyLtd that you should be aware of before investing here.

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.