These 4 Measures Indicate That Jiangxi Welgao Electronics (SZSE:301251) Is Using Debt Extensively

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 the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Jiangxi Welgao Electronics

What Is Jiangxi Welgao Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jiangxi Welgao Electronics had CN¥192.2m of debt, an increase on CN¥105.1m, over one year. But on the other hand it also has CN¥921.5m in cash, leading to a CN¥729.3m net cash position.

A Look At Jiangxi Welgao Electronics' Liabilities

The latest balance sheet data shows that Jiangxi Welgao Electronics had liabilities of CN¥583.0m due within a year, and liabilities of CN¥9.29m falling due after that. On the other hand, it had cash of CN¥921.5m and CN¥278.6m worth of receivables due within a year. So it actually has CN¥607.8m more liquid assets than total liabilities.

This surplus suggests that Jiangxi Welgao Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

It is just as well that Jiangxi Welgao Electronics's load is not too heavy, because its EBIT was down 34% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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¥729.3m in net cash and a decent-looking balance sheet. So while Jiangxi Welgao Electronics does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Jiangxi Welgao Electronics is showing 2 warning signs in our investment analysis , you should know about...

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.

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