Is Jutze Intelligence TechnologyLtd (SZSE:300802) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Jutze Intelligence Technology Co.,Ltd (SZSE:300802) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jutze Intelligence TechnologyLtd

What Is Jutze Intelligence TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Jutze Intelligence TechnologyLtd had debt of CN¥14.3m, up from none in one year. But it also has CN¥889.7m in cash to offset that, meaning it has CN¥875.5m net cash.

How Strong Is Jutze Intelligence TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Jutze Intelligence TechnologyLtd had liabilities of CN¥173.1m falling due within a year, and liabilities of CN¥19.5m due beyond that. Offsetting these obligations, it had cash of CN¥889.7m as well as receivables valued at CN¥329.3m due within 12 months. So it actually has CN¥1.03b more liquid assets than total liabilities.

This surplus suggests that Jutze Intelligence TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Jutze Intelligence TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Jutze Intelligence TechnologyLtd's load is not too heavy, because its EBIT was down 56% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jutze Intelligence TechnologyLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jutze Intelligence 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. During the last three years, Jutze Intelligence TechnologyLtd produced sturdy free cash flow equating to 75% 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 it is always sensible to investigate a company's debt, in this case Jutze Intelligence TechnologyLtd has CN¥875.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥107m, being 75% of its EBIT. So we don't have any problem with Jutze Intelligence TechnologyLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jutze Intelligence TechnologyLtd's earnings per share history for free.

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.