AVIC Jonhon Optronic TechnologyLtd (SZSE:002179) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies AVIC Jonhon Optronic Technology Co.,Ltd. (SZSE:002179) makes use of debt. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AVIC Jonhon Optronic TechnologyLtd

How Much Debt Does AVIC Jonhon Optronic TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that AVIC Jonhon Optronic TechnologyLtd had CN¥870.1m of debt in March 2024, down from CN¥1.45b, one year before. However, it does have CN¥9.03b in cash offsetting this, leading to net cash of CN¥8.16b.

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

According to the last reported balance sheet, AVIC Jonhon Optronic TechnologyLtd had liabilities of CN¥11.5b due within 12 months, and liabilities of CN¥991.4m due beyond 12 months. On the other hand, it had cash of CN¥9.03b and CN¥13.6b worth of receivables due within a year. So it can boast CN¥10.2b 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. Simply put, the fact that AVIC Jonhon Optronic TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, AVIC Jonhon Optronic TechnologyLtd grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. 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 AVIC Jonhon Optronic 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AVIC Jonhon Optronic 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, AVIC Jonhon Optronic TechnologyLtd recorded free cash flow of 28% 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 AVIC Jonhon Optronic TechnologyLtd has net cash of CN¥8.16b, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.4% over the last year. So we don't have any problem with AVIC Jonhon Optronic TechnologyLtd's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for AVIC Jonhon Optronic TechnologyLtd you should know about.

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.

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.