Is Tianjin Jingwei Huikai Optoelectronic (SZSE:300120) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tianjin Jingwei Huikai Optoelectronic Co., Ltd. (SZSE:300120) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tianjin Jingwei Huikai Optoelectronic

How Much Debt Does Tianjin Jingwei Huikai Optoelectronic Carry?

You can click the graphic below for the historical numbers, but it shows that Tianjin Jingwei Huikai Optoelectronic had CN¥854.4m of debt in September 2024, down from CN¥951.6m, one year before. But on the other hand it also has CN¥991.8m in cash, leading to a CN¥137.4m net cash position.

A Look At Tianjin Jingwei Huikai Optoelectronic's Liabilities

We can see from the most recent balance sheet that Tianjin Jingwei Huikai Optoelectronic had liabilities of CN¥1.18b falling due within a year, and liabilities of CN¥452.1m due beyond that. Offsetting these obligations, it had cash of CN¥991.8m as well as receivables valued at CN¥948.0m due within 12 months. So it actually has CN¥307.8m more liquid assets than total liabilities.

This surplus suggests that Tianjin Jingwei Huikai Optoelectronic has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Jingwei Huikai Optoelectronic boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Tianjin Jingwei Huikai Optoelectronic's EBIT fell a jaw-dropping 57% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tianjin Jingwei Huikai Optoelectronic's earnings that will influence how the balance sheet holds up in the future. 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. Tianjin Jingwei Huikai Optoelectronic 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. Over the last three years, Tianjin Jingwei Huikai Optoelectronic 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 Tianjin Jingwei Huikai Optoelectronic has net cash of CN¥137.4m, as well as more liquid assets than liabilities. Despite the cash, we do find Tianjin Jingwei Huikai Optoelectronic's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. We've identified 2 warning signs with Tianjin Jingwei Huikai Optoelectronic , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.