Does Jiangxi Welgao Electronics (SZSE:301251) Have A 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. As with many other companies Jiangxi Welgao Electronics Co., Ltd. (SZSE:301251) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jiangxi Welgao Electronics

How Much Debt Does Jiangxi Welgao Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Jiangxi Welgao Electronics had debt of CN¥160.8m, up from CN¥105.1m in one year. However, it does have CN¥1.02b in cash offsetting this, leading to net cash of CN¥859.3m.

A Look At Jiangxi Welgao Electronics' Liabilities

We can see from the most recent balance sheet that Jiangxi Welgao Electronics had liabilities of CN¥527.8m falling due within a year, and liabilities of CN¥11.6m due beyond that. On the other hand, it had cash of CN¥1.02b and CN¥293.0m worth of receivables due within a year. So it actually has CN¥773.5m more liquid assets than total liabilities.

It's good to see that Jiangxi Welgao Electronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jiangxi Welgao Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Jiangxi Welgao Electronics has seen its EBIT plunge 12% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jiangxi Welgao Electronics will need earnings to service that debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jiangxi Welgao Electronics 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. Over the last three years, Jiangxi Welgao Electronics 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 it is always sensible to investigate a company's debt, in this case Jiangxi Welgao Electronics has CN¥859.3m in net cash and a decent-looking balance sheet. So we are not troubled with Jiangxi Welgao Electronics's debt use. 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. We've identified 1 warning sign with Jiangxi Welgao Electronics , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.