JH Educational Technology (HKG:1935) Has A Rock Solid Balance Sheet

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 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 JH Educational Technology INC. (HKG:1935) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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.

View our latest analysis for JH Educational Technology

What Is JH Educational Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 JH Educational Technology had debt of CN¥50.0m, up from none in one year. However, it does have CN¥989.3m in cash offsetting this, leading to net cash of CN¥939.3m.

A Look At JH Educational Technology's Liabilities

We can see from the most recent balance sheet that JH Educational Technology had liabilities of CN¥201.2m falling due within a year, and liabilities of CN¥35.8m due beyond that. On the other hand, it had cash of CN¥989.3m and CN¥210.0k worth of receivables due within a year. So it actually has CN¥752.5m more liquid assets than total liabilities.

This surplus strongly suggests that JH Educational Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that JH Educational Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, JH Educational Technology grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is JH Educational Technology's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. While JH Educational Technology 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 most recent three years, JH Educational Technology recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JH Educational Technology has net cash of CN¥939.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 35% year-on-year EBIT growth. At the end of the day we're not concerned about JH Educational Technology's debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for JH Educational Technology you should know about.

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.