Here's Why JNBY Design (HKG:3306) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies JNBY Design Limited (HKG:3306) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that 3306 is potentially undervalued!

What Is JNBY Design's Net Debt?

As you can see below, JNBY Design had CN¥148.9m of debt at June 2022, down from CN¥243.6m a year prior. However, its balance sheet shows it holds CN¥1.08b in cash, so it actually has CN¥934.5m net cash.

A Look At JNBY Design's Liabilities

Zooming in on the latest balance sheet data, we can see that JNBY Design had liabilities of CN¥1.75b due within 12 months and liabilities of CN¥466.1m due beyond that. On the other hand, it had cash of CN¥1.08b and CN¥111.5m worth of receivables due within a year. So it has liabilities totalling CN¥1.02b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since JNBY Design has a market capitalization of CN¥3.79b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, JNBY Design boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, JNBY Design's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine JNBY Design's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JNBY Design 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, JNBY Design actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While JNBY Design does have more liabilities than liquid assets, it also has net cash of CN¥934.5m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in CN¥713m. So we are not troubled with JNBY Design's debt use. 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. We've identified 1 warning sign with JNBY Design , 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.