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.' 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 Jason Furniture (Hangzhou) Co.,Ltd. (SHSE:603816) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Jason Furniture (Hangzhou)Ltd's Debt?
You can click the graphic below for the historical numbers, but it shows that Jason Furniture (Hangzhou)Ltd had CN¥1.27b of debt in March 2024, down from CN¥2.13b, one year before. However, it does have CN¥2.58b in cash offsetting this, leading to net cash of CN¥1.31b.
A Look At Jason Furniture (Hangzhou)Ltd's Liabilities
We can see from the most recent balance sheet that Jason Furniture (Hangzhou)Ltd had liabilities of CN¥5.25b falling due within a year, and liabilities of CN¥497.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.58b as well as receivables valued at CN¥1.61b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.56b.
Since publicly traded Jason Furniture (Hangzhou)Ltd shares are worth a total of CN¥30.9b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jason Furniture (Hangzhou)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Jason Furniture (Hangzhou)Ltd has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. 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 Jason Furniture (Hangzhou)Ltd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jason Furniture (Hangzhou)Ltd 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, Jason Furniture (Hangzhou)Ltd reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Jason Furniture (Hangzhou)Ltd has CN¥1.31b in net cash. And we liked the look of last year's 22% year-on-year EBIT growth. So we are not troubled with Jason Furniture (Hangzhou)Ltd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Jason Furniture (Hangzhou)Ltd (including 1 which can't be ignored) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.