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.' 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 Jangho Group Co., Ltd. (SHSE:601886) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jangho Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Jangho Group had CN¥2.49b of debt in September 2024, down from CN¥2.66b, one year before. However, it does have CN¥4.63b in cash offsetting this, leading to net cash of CN¥2.14b.

A Look At Jangho Group's Liabilities

According to the last reported balance sheet, Jangho Group had liabilities of CN¥19.2b due within 12 months, and liabilities of CN¥1.09b due beyond 12 months. Offsetting this, it had CN¥4.63b in cash and CN¥16.4b in receivables that were due within 12 months. So it can boast CN¥750.8m more liquid assets than total liabilities.

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

And we also note warmly that Jangho Group grew its EBIT by 18% last year, making its debt load easier to handle. 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 Jangho Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jangho Group 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 two years, Jangho Group recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jangho Group has CN¥2.14b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 68% of its EBIT. So is Jangho Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Jangho Group .

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.