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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Johnson Electric Holdings Limited (HKG:179) makes use of debt. But is this debt a concern to shareholders?

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Johnson Electric Holdings's Net Debt?

As you can see below, Johnson Electric Holdings had US$359.3m of debt at March 2025, down from US$560.8m a year prior. But it also has US$818.0m in cash to offset that, meaning it has US$458.6m net cash.

How Healthy Is Johnson Electric Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Johnson Electric Holdings had liabilities of US$855.0m due within 12 months and liabilities of US$501.4m due beyond that. Offsetting this, it had US$818.0m in cash and US$714.5m in receivables that were due within 12 months. So it actually has US$176.1m more liquid assets than total liabilities.

This surplus suggests that Johnson Electric Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Johnson Electric Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out 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 it is future earnings, more than anything, that will determine Johnson Electric Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Johnson Electric Holdings 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, Johnson Electric Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Johnson Electric Holdings has net cash of US$458.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in US$251m. So is Johnson Electric Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Johnson Electric Holdings's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.