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.' 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. We note that Jafron Biomedical Co.,Ltd. (SZSE:300529) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jafron BiomedicalLtd's Debt?

The image below, which you can click on for greater detail, shows that Jafron BiomedicalLtd had debt of CN¥1.62b at the end of September 2024, a reduction from CN¥1.72b over a year. However, it does have CN¥2.71b in cash offsetting this, leading to net cash of CN¥1.10b.

How Healthy Is Jafron BiomedicalLtd's Balance Sheet?

We can see from the most recent balance sheet that Jafron BiomedicalLtd had liabilities of CN¥872.9m falling due within a year, and liabilities of CN¥1.43b due beyond that. On the other hand, it had cash of CN¥2.71b and CN¥217.8m worth of receivables due within a year. So it actually has CN¥631.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Jafron BiomedicalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Jafron BiomedicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jafron BiomedicalLtd grew its EBIT by 125% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jafron BiomedicalLtd can strengthen its balance sheet over time. 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. Jafron BiomedicalLtd 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. During the last three years, Jafron BiomedicalLtd generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jafron BiomedicalLtd has net cash of CN¥1.10b, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥873m. So we don't think Jafron BiomedicalLtd'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. Be aware that Jafron BiomedicalLtd is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.