The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Jafron Biomedical Co.,Ltd. (SZSE:300529) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jafron BiomedicalLtd's Debt?

As you can see below, Jafron BiomedicalLtd had CN¥1.67b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥2.76b in cash, so it actually has CN¥1.09b net cash.

How Strong Is Jafron BiomedicalLtd's Balance Sheet?

We can see from the most recent balance sheet that Jafron BiomedicalLtd had liabilities of CN¥1.01b falling due within a year, and liabilities of CN¥1.40b due beyond that. Offsetting these obligations, it had cash of CN¥2.76b as well as receivables valued at CN¥101.6m due within 12 months. So it can boast CN¥443.8m 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 109% 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jafron BiomedicalLtd 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. During the last three years, Jafron BiomedicalLtd generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Jafron BiomedicalLtd has net cash of CN¥1.09b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥926m, being 83% of its EBIT. 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. We've identified 1 warning sign with Jafron BiomedicalLtd , and understanding them should be part of your investment process.

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.