Is Johnson Electric Holdings (HKG:179) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Johnson Electric Holdings Limited (HKG:179) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Johnson Electric Holdings's Debt?

The image below, which you can click on for greater detail, shows that Johnson Electric Holdings had debt of US$359.3m at the end of March 2025, a reduction from US$560.8m over a year. But it also has US$818.0m in cash to offset that, meaning it has US$458.6m net cash.

How Strong Is Johnson Electric Holdings' Balance Sheet?

We can see from the most recent balance sheet that Johnson Electric Holdings had liabilities of US$855.0m falling due within a year, and liabilities of US$501.4m due beyond that. Offsetting these obligations, it had cash of US$818.0m as well as receivables valued at US$714.5m due within 12 months. So it can boast US$176.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Johnson Electric Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Johnson Electric Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Johnson Electric Holdings

Fortunately, Johnson Electric Holdings grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Johnson Electric Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Johnson Electric Holdings 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. Happily for any shareholders, Johnson Electric Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Johnson Electric Holdings has US$458.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$251m, being 119% of its EBIT. So is Johnson Electric Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Johnson Electric Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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.