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. We can see that Jason Furniture (Hangzhou) Co.,Ltd. (SHSE:603816) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Jason Furniture (Hangzhou)Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jason Furniture (Hangzhou)Ltd had CN¥1.09b of debt in June 2024, down from CN¥2.42b, one year before. But it also has CN¥1.82b in cash to offset that, meaning it has CN¥728.3m net cash.

How Strong Is Jason Furniture (Hangzhou)Ltd's Balance Sheet?

The latest balance sheet data shows that Jason Furniture (Hangzhou)Ltd had liabilities of CN¥5.57b due within a year, and liabilities of CN¥494.0m falling due after that. Offsetting this, it had CN¥1.82b in cash and CN¥1.56b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.69b.

Since publicly traded Jason Furniture (Hangzhou)Ltd shares are worth a total of CN¥18.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jason Furniture (Hangzhou)Ltd also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Jason Furniture (Hangzhou)Ltd grew its EBIT by 15% last year, making its debt load easier to handle. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. In the last three years, Jason Furniture (Hangzhou)Ltd's free cash flow amounted to 28% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Jason Furniture (Hangzhou)Ltd does have more liabilities than liquid assets, it also has net cash of CN¥728.3m. And it also grew its EBIT by 15% over the last year. So we don't have any problem with Jason Furniture (Hangzhou)Ltd'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. To that end, you should learn about the 2 warning signs we've spotted with Jason Furniture (Hangzhou)Ltd (including 1 which is a bit concerning) .

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.