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. As with many other companies Shenzhen Jufei Optoelectronics Co., Ltd. (SZSE:300303) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Jufei Optoelectronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Jufei Optoelectronics had CN¥467.9m of debt in September 2024, down from CN¥668.9m, one year before. However, it does have CN¥1.91b in cash offsetting this, leading to net cash of CN¥1.45b.

How Strong Is Shenzhen Jufei Optoelectronics' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Jufei Optoelectronics had liabilities of CN¥1.91b falling due within a year, and liabilities of CN¥492.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.91b as well as receivables valued at CN¥1.58b due within 12 months. So it actually has CN¥1.09b more liquid assets than total liabilities.

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

But the other side of the story is that Shenzhen Jufei Optoelectronics saw its EBIT decline by 7.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Jufei Optoelectronics'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhen Jufei Optoelectronics 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, Shenzhen Jufei Optoelectronics recorded free cash flow worth 51% 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 Shenzhen Jufei Optoelectronics has CN¥1.45b in net cash and a decent-looking balance sheet. So we don't have any problem with Shenzhen Jufei Optoelectronics's use of debt. 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. For instance, we've identified 5 warning signs for Shenzhen Jufei Optoelectronics (1 is significant) 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.