Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Joyoung Co.,Ltd (SZSE:002242) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JoyoungLtd

How Much Debt Does JoyoungLtd Carry?

As you can see below, at the end of September 2023, JoyoungLtd had CN¥21.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.87b in cash, so it actually has CN¥1.84b net cash.

How Strong Is JoyoungLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JoyoungLtd had liabilities of CN¥3.59b due within 12 months and liabilities of CN¥68.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.87b as well as receivables valued at CN¥2.35b due within 12 months. So it can boast CN¥550.2m more liquid assets than total liabilities.

This surplus suggests that JoyoungLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that JoyoungLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact JoyoungLtd's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine JoyoungLtd'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 company can only pay off debt with cold hard cash, not accounting profits. While JoyoungLtd 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, JoyoungLtd 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 we empathize with investors who find debt concerning, you should keep in mind that JoyoungLtd has net cash of CN¥1.84b, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥172m. So we are not troubled with JoyoungLtd'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. We've identified 1 warning sign with JoyoungLtd , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.