Ji'an Mankun Technology (SZSE:301132) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Ji'an Mankun Technology Co., Ltd. (SZSE:301132) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ji'an Mankun Technology

How Much Debt Does Ji'an Mankun Technology Carry?

As you can see below, at the end of September 2024, Ji'an Mankun Technology had CN¥70.0m of debt, up from CN¥55.0m a year ago. Click the image for more detail. But it also has CN¥835.5m in cash to offset that, meaning it has CN¥765.4m net cash.

How Strong Is Ji'an Mankun Technology's Balance Sheet?

The latest balance sheet data shows that Ji'an Mankun Technology had liabilities of CN¥696.2m due within a year, and liabilities of CN¥32.7m falling due after that. Offsetting these obligations, it had cash of CN¥835.5m as well as receivables valued at CN¥582.5m due within 12 months. So it can boast CN¥689.1m more liquid assets than total liabilities.

This surplus suggests that Ji'an Mankun Technology 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. Succinctly put, Ji'an Mankun Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ji'an Mankun Technology has increased its EBIT by 4.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Ji'an Mankun Technology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ji'an Mankun 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. Over the last three years, Ji'an Mankun Technology saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ji'an Mankun Technology has net cash of CN¥765.4m, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.4% over the last year. So we are not troubled with Ji'an Mankun Technology's debt use. 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. To that end, you should learn about the 2 warning signs we've spotted with Ji'an Mankun Technology (including 1 which is a bit unpleasant) .

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.