JH Educational Technology (HKG:1935) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that JH Educational Technology INC. (HKG:1935) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for JH Educational Technology

How Much Debt Does JH Educational Technology Carry?

As you can see below, at the end of June 2022, JH Educational Technology had CN¥50.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥989.3m in cash, leading to a CN¥939.3m net cash position.

How Healthy Is JH Educational Technology's Balance Sheet?

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 can boast CN¥752.5m more liquid assets than total liabilities.

This excess liquidity suggests that JH Educational Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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.

In addition to that, we're happy to report that JH Educational Technology has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JH Educational Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JH Educational Technology 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. Over the most recent three years, JH Educational Technology recorded free cash flow worth 71% 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 it is always sensible to investigate a company's debt, in this case JH Educational Technology has CN¥939.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 35% over the last year. So we don't think JH Educational Technology's use of debt is risky. 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. For example - JH Educational Technology has 1 warning sign we think you should be aware of.

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.