Is Jiangxi Welgao Electronics (SZSE:301251) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jiangxi Welgao Electronics

How Much Debt Does Jiangxi Welgao Electronics Carry?

As you can see below, at the end of September 2024, Jiangxi Welgao Electronics had CN¥301.9m of debt, up from CN¥160.8m a year ago. Click the image for more detail. But it also has CN¥959.1m in cash to offset that, meaning it has CN¥657.2m net cash.

A Look At Jiangxi Welgao Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangxi Welgao Electronics had liabilities of CN¥836.5m due within 12 months and liabilities of CN¥6.49m due beyond that. On the other hand, it had cash of CN¥959.1m and CN¥300.5m worth of receivables due within a year. So it can boast CN¥416.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Jiangxi Welgao Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

In fact Jiangxi Welgao Electronics's saving grace is its low debt levels, because its EBIT has tanked 57% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jiangxi Welgao Electronics will need earnings to service that debt. 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. 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. During the last three years, Jiangxi Welgao Electronics burned a lot of cash. 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¥657.2m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Jiangxi Welgao Electronics's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Jiangxi Welgao Electronics (including 1 which is potentially serious) .

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.