Jin Medical International (NASDAQ:ZJYL) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jin Medical International Ltd. (NASDAQ:ZJYL) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jin Medical International

How Much Debt Does Jin Medical International Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Jin Medical International had US$9.68m of debt, an increase on US$1.46m, over one year. But on the other hand it also has US$26.0m in cash, leading to a US$16.3m net cash position.

How Healthy Is Jin Medical International's Balance Sheet?

We can see from the most recent balance sheet that Jin Medical International had liabilities of US$14.8m falling due within a year, and liabilities of US$179.7k due beyond that. On the other hand, it had cash of US$26.0m and US$5.54m worth of receivables due within a year. So it can boast US$16.5m more liquid assets than total liabilities.

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

But the bad news is that Jin Medical International has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jin Medical International'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 Jin Medical International 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, Jin Medical International recorded free cash flow worth 79% 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 Jin Medical International has net cash of US$16.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -US$754k, being 79% of its EBIT. So we are not troubled with Jin Medical International's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Jin Medical International that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.