These 4 Measures Indicate That Beijing Jiaxun Feihong Electrical (SZSE:300213) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Beijing Jiaxun Feihong Electrical Co., Ltd. (SZSE:300213) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Beijing Jiaxun Feihong Electrical

What Is Beijing Jiaxun Feihong Electrical's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Beijing Jiaxun Feihong Electrical had debt of CN¥263.0m, up from CN¥234.4m in one year. But it also has CN¥340.1m in cash to offset that, meaning it has CN¥77.0m net cash.

A Look At Beijing Jiaxun Feihong Electrical's Liabilities

We can see from the most recent balance sheet that Beijing Jiaxun Feihong Electrical had liabilities of CN¥840.8m falling due within a year, and liabilities of CN¥25.4m due beyond that. Offsetting these obligations, it had cash of CN¥340.1m as well as receivables valued at CN¥1.26b due within 12 months. So it can boast CN¥729.2m more liquid assets than total liabilities.

This surplus suggests that Beijing Jiaxun Feihong Electrical is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Beijing Jiaxun Feihong Electrical has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Beijing Jiaxun Feihong Electrical saw its EBIT decline by 9.6% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Jiaxun Feihong Electrical's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Beijing Jiaxun Feihong Electrical 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. In the last three years, Beijing Jiaxun Feihong Electrical's free cash flow amounted to 43% of its EBIT, less 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 Beijing Jiaxun Feihong Electrical has CN¥77.0m in net cash and a decent-looking balance sheet. So we are not troubled with Beijing Jiaxun Feihong Electrical's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Beijing Jiaxun Feihong Electrical is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.