Jones Tech (SZSE:300684) Could Easily Take On More Debt

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. We note that Jones Tech PLC (SZSE:300684) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Jones Tech

What Is Jones Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Jones Tech had CN¥12.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥998.2m in cash, so it actually has CN¥985.3m net cash.

How Healthy Is Jones Tech's Balance Sheet?

According to the last reported balance sheet, Jones Tech had liabilities of CN¥506.2m due within 12 months, and liabilities of CN¥13.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥998.2m as well as receivables valued at CN¥522.0m due within 12 months. So it actually has CN¥1.00b more liquid assets than total liabilities.

This surplus suggests that Jones Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jones Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Jones Tech grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jones Tech 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 Jones Tech 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. During the last three years, Jones Tech produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jones Tech has net cash of CN¥985.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 32% year-on-year EBIT growth. So we don't think Jones Tech's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Jones Tech you should be aware of.

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.