These 4 Measures Indicate That Jonhon Optronic Technology (SZSE:002179) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jonhon Optronic Technology Co., Ltd. (SZSE:002179) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jonhon Optronic Technology

How Much Debt Does Jonhon Optronic Technology Carry?

As you can see below, Jonhon Optronic Technology had CN¥1.01b of debt at September 2024, down from CN¥1.25b a year prior. But on the other hand it also has CN¥8.00b in cash, leading to a CN¥6.99b net cash position.

How Strong Is Jonhon Optronic Technology's Balance Sheet?

The latest balance sheet data shows that Jonhon Optronic Technology had liabilities of CN¥13.1b due within a year, and liabilities of CN¥876.6m falling due after that. On the other hand, it had cash of CN¥8.00b and CN¥15.3b worth of receivables due within a year. So it can boast CN¥9.29b more liquid assets than total liabilities.

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

On the other hand, Jonhon Optronic Technology's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Jonhon Optronic Technology 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jonhon Optronic Technology 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, Jonhon Optronic Technology recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jonhon Optronic Technology has CN¥6.99b in net cash and a decent-looking balance sheet. So we don't have any problem with Jonhon Optronic Technology'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 Jonhon Optronic Technology you should know about.

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.